SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 3
to
FORM S-1
Registration Statement Underunder the Securities Act of 1933
DAUPHIN TECHNOLOGY, INC.
------------------------
(Exact Name of Registrant as Specified in Its Charter)
ILLINOIS
(State or Other Jurisdiction of Incorporation or Organization)
3570
(Primary Standard Industrial Classification Code Number)
87-0455038
(I.R.S. Employer Identification No.)
800 E. Northwest Hwy., Suite 950, Palatine, IL 60067 847-358-4406
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
Andrew J. Kandalepas, President 800 E. Northwest Hwy., Suite 950,
Palatine, IL 60067 847-358-4406
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent For
ILLINOIS 3570 87-0455038
---------------------------------------------------------------------------------------------------
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer Number)
of Incorporation or Organization) Industrial Classification
Identification No.)
800 E. Northwest Hwy., Suite 950, Palatine, IL 60067 847-358-4406
-----------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
Andrew J. Kandalepas, President 800 E. Northwest Hwy., Suite 950, Palatine, IL 60067 847-358-4406
-------------------------------------------------------------------------------------------------
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
Approximate date of commencement of proposed sale to the public: From
time to time after the effective date of this Registration
Statementregistration statement as
determined by the Selling Stockholdersselling shareholders.
If any of the securities being registered on this formForm are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following. Xfollowing box [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box.[_]
CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------
Title of Each Class Amount to be Proposed Maximum Proposed Maximum Amount of
of Securities to be Registered Offering Aggregate Offering Amount ofRegistration
Registered Amount to be Registered(1)(2) Price Per Share (1) Price RegistrationPerShare (2) Price(2) Fee
- ----------------------------------------------------------------------------------------------------------------
Common Stock
$0.001 Par Value 7,487,935 $ 1.00 $ 7,487,935 $ 4,492.766,605,977 $0.60 $3,963,586 $947
(1) Estimated solelyIn the event of a stock split, stock dividend, or similar transaction
involving the Company's common stock, in order to prevent dilution,
the number of shares registered shall automatically be increased to
cover the additional shares in accordance with Rule 416(a) under the
Securities Act.
(2) In accordance with a registration rights agreement with a shareholder,
the Company is required to register for resale an aggregate minimum of
4,000,000 shares of common stock to cover the purposecommon stock issuable or
to be issued upon conversion of computinga Convertible Note and the registration fee
pursuant to Rule 457, basedexercise of
the warrants. The Convertible Note is convertible into shares of
common stock on a formula of the lower of (i)110% of the average of
the highBid Prices during the ten Trading Days prior to September 28, 2001
and low reported
sales on March 13, 1998.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until (ii)the Registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in
accordance with Section 8(a)average of the Securities Actlowest three consecutive Bid prices during
the 22-day period immediately preceding the conversion date. If
converted as of June 11, 2002, such shares would convert into
5,905,977 of common stock assuming a conversion price of $0.4233 per
share.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 or until the
Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a)OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
may determine.MAY DETERMINE.
DAUPHIN TECHNOLOGY, INC.
_______________
Cross-Reference Sheet Between Items of Form S-1 and
Form of Prospectus Pursuant to Regulation S-K, Item 501(b)
Item No. Location in Prospectus
1. Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus.............................. Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus....................... Inside Front and
Outside Back Cover Pages
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges......................................... Prospectus Summary; Risk
Factors; The Company
4. Use of Proceeds................................. Use of Proceeds
5. Determination of Offering Price................. Outside Front Cover Page;
Selling Stockholders and
Plan of Distribution
6. Dilution........................................ Not Applicable
7. Selling Security Holders........................ Selling Stockholders and
Plan of Distribution
8. Plan of Distribution............................ Outside Front Cover Page;
Selling Stockholders and
Plan of Distribution
9. Description of Securities to
be Registered................................... Outside Front Cover Page;
Description of Capital Stock
10. Interests of Named Experts and Counsel.......... Legal Matters
11. Information with Respect to the Registrant...... The Company; The Registration;
Risk Factors; Market Price
of Common Stock and Dividend
Policy; Selected Financial Data;
Management's Discussion and
Analysis of Financial Condition
and Results of Operations; Business;
Description of Property; Management;
Executive Compensation; Certain
Relationships and Related Party
Transactions; Principal Stockholders;
Description of Capital Stock; Share
Transfer Restrictions; Financial
Statements
12. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities................................. Not Applicable
7,487,935 COMMON SHARES
DAUPHIN TECHNOLOGY, INC.
COMMON STOCK
The shares6,605,977 Shares of Common Stock
(the "Shares")$0.60 Bid Price as of Dauphin Technology, Inc.June 11, 2002
THE COMPANY
We design and sell mobile hand-held, pen-based computers and broadband
set-top boxes, as well as other electronic devices for home and business use and
perform design services, process methodology consulting and intellectual
property development.
Our corporate offices are located at:
800 East Northwest Highway
Suite 950
Palatine, Illinois 60067
(847) 358-4406
Our shares trade on the over-the-counter market electronic bulletin
board operated by the NASD under the symbol "DNTK.OB".
THE OFFERING
We are registering 6,605,977 shares of common stock which may be
acquired by Crescent International Ltd. ("Dauphin"Crescent" or "selling shareholder"),
an investment company managed by GreenLight (Switzerland) SA, through the
exercise of warrants or the "Company")conversion of Convertible Notes. These shares may be
offered hereby consist of 4,523,608 Shares
owned by stockholders of the Company described herein (the "Selling
Stockholders") and 2,964,327 Shares offered by the Company. The Shares
offered by the Selling Stockholders may be sold from time to time in
transactions in the over-the-counter market or otherwise at prices and
at terms prevailing at the time of sale, at prices related to the then-
current market price or in negotiated transactions without the use of a
broker-dealer or underwriter. The Companytime. We will not receive any of the proceeds from
the sale other than from the possible exercise of warrants to purchase 700,000
shares of common stock at $1.3064 per share.
Had Crescent exercised its warrants and converted the Convertible Note
on June 11, 2002, Crescent would have received 5,905,977 shares of our common
stock. As of the Shares owned by the Selling Stockholders.
The Shares offered bysame date, the Company may be offered directly by the
Officers or Directorswould have received an aggregate amount
of the Company$914,480 from time to time without the use
of a broker-dealer or underwriter and without compensation.
The Selling Stockholders may be deemed to be "Underwriters" as defined
in the Securities Act of 1933, as amended (the "Securities Act"). If
any broker-dealers are used by the Selling Stockholders, any commissions
paid to broker-dealers and, if broker-dealers purchase any of the Shares
as principals, any profits received by such broker-dealers on the resale
of the Shares, may be deemed to be underwriting discounts or commissions
under the Securities Act. In addition, any profits realized by the
Selling Stockholders may be deemed to be underwriting commissions. All
costs, expenses and feesCrescent in connection with the registrationits exercise of the Shares offered700,000
warrants. Under the terms of our securities purchase agreement with Crescent,
the number of shares to be purchased by Crescent or to be obtained upon the
Selling Stockholdersexercise of warrants or conversion of the Convertible Note held by Crescent
cannot exceed the number of shares that, when combined with all other shares of
common stock and securities then owned by Crescent, would result in Crescent
owning more than 9.9% of our outstanding common stock at any given point of
time. See "Recent Developments" on page 6.
Investing in our shares involves a high degree of risk. You should
invest only if you can afford a complete loss of your investment. See "Risk
Factors" beginning on page 7.
Unless the context indicates otherwise, all references to "we", "our",
"us", and the "Company" refer to Dauphin Technology, Inc. and its subsidiaries.
Neither the Securities and Exchange Commission ("SEC") nor any state
securities commission has determined whether this prospectus is truthful or
complete. Nor have they made, nor will be borne by the Company.
Brokerage commissions, ifthey make, any attributabledetermination as to
whether anyone should buy these securities. Any representation to the sale of the Shares
will be borne by the Selling Stockholders. (See "Plan of
Distribution.")
All of the outstanding Shares have been "Restricted Securities" under
the Securities Act of 1933, as amended (the "Act") prior to their
registration hereunder. The Company issued the Shares to the Selling
Stockholders incontrary
is a private transaction during 1997. In connection with
such private transaction, the Company also issued 131,756 of the Shares
to a sales agent and such Shares are also covered by this registration.
The Company wishes to register an additional 2,964,327 Shares to be
issued at a later date by the Company without the use of a broker-dealer
or underwriter and without compensation. This Prospectus has been
prepared so that future sales of the Shares by the Selling Stockholders
will not be restricted under the Act. In connection with any sales, the
Selling Stockholders and any broker-dealers participating in such sales
may be deemed to be "underwriters" within the meaning of the Act. (See
"Selling Stockholders" and "Plan of Distribution.")
The Common Stock of the Company is quoted in the National Quotation
Bureau's Pink Sheets under the symbol "DNTK."
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
COMMON STOCK
$0.001 Par Value
$1.281 Bid Price on March 13, 1998criminal offense.
- --------------------------------------------------------------------------------
The Date of this Prospectus is March 13, 1998June 12, 2002
AVAILABLE INFORMATION
The CompanyTABLE OF CONTENTS
Prospectus Summary 5
Risk Factors 7
Forward Looking Statements 14
Where You Can Find More Information 14
Use of Proceeds 15
Recently Issued Securities 15
Market Price of Common Stock
and Dividend Policy 19
Selected Financial Data 19
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 20
Business 23
Description of Property 27
Management 28
Executive Compensation 30
Certain Relationships and Related
Transactions 30
Principal Stockholders 31
Description of Capital Stock 32
Plan of Distribution 33
Selling Stockholder 34
Legal Matters 35
Experts 35
Index to Consolidated Financial Statements F-1
4
ABOUT THIS PROSPECTUS
This prospectus is subject to the informational requirementspart of the
Securities Exchange Act of 1934, as amended, and in accordance
therewith, reports, proxy statements and other informationa registration statement that we filed with
the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information filed bySEC, utilizing a "shelf" registration process. In accordance with a
registration rights agreement with Crescent International Ltd., the Company canis
required to initially register for resale an aggregate of 6,605,977 shares of
common stock to cover the common stock to be inspected and copied at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington
D.C., and at the Commission's Chicago Regional Office, 500 West Madison
Street, Chicago, Illinois 60661; and New York Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Sectionissued upon conversion of the
Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington D.C.
20549 at prescribed rates. In addition, such material may be inspectedConvertible Note and printed from the Commission's internet site located at
http://www.sec.gov.exercise of the warrants. The Company has filedConvertible Note is
convertible into shares of common stock by a formula of the lower of (i)$1.1561,
which represents 110% of the average of the Bid Prices during the ten Trading
Days prior to September 28, 2001 and (ii)the average of the lowest three
consecutive Bid prices during the 22-day period immediately preceding the
conversion date.
Each time we offer shares or warrants we will provide a prospectus
supplement that will contain specific information about that offer.
You should read this prospectus together with the Commission a Registration Statement on
Form S-1 (together with any amendments thereto, the "Registration
Statement")additional
information described under the Securities Actheading, "Where You Can Find More Information."
No person has been authorized to give any information or to make any
representations in connection with respect to the Common Stock.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and the Shares,
reference is made to the Registration Statement and the exhibits and
schedules thereto. Statementsthis offering except those contained in this
Prospectusprospectus. Neither Dauphin nor the selling shareholder has authorized anyone
else to provide you with different information.
You should not assume that any information contained in this prospectus
is accurate as to the
contents of any contracts ordate other documents arethan the date on the front page of this
prospectus. Neither Dauphin nor the selling shareholder is making an offer of
shares in any state where the offer is not necessarily
completepermitted.
In this prospectus, reference to "we", "us" and in each instance, reference is made"our" refer to the copy of such
contract or document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
Copies of the Registration Statement, including all exhibits and
schedules thereto may be obtained from the Commission's principal office
in Washington D.C. upon payment of the fees prescribed by the
Commission, or may be examined without charge at the offices of the
Commission.
Dauphin
Technology, Inc.
PROSPECTUS SUMMARY
TheYou should read the following summary is qualified in its entirety by reference to, and
should be read in conjunctiontogether with the more detailed
information and Financial Statements,financial statements, including the Notes thereto,notes to the financial
statements, appearing elsewhere in this Prospectus. Any referenceprospectus.
Our Business
We design and sell mobile hand-held, pen-based computers and broadband
set-top boxes, and other related electronic devices for home and business use.
We also provide private, interactive cable systems to "Dauphin"the extended stay
hospitality industry and perform design services, process methodology consulting
and intellectual property development. Orasis(R) is a mobile hand-held,
pen-based computer that incorporates features, which we believe provide greater
power and flexibility to address performance requirements in a variety of
industrial and commercial uses. We have produced a limited number of Orasis(R)
units that have been used for marketing and limited sales. We are currently
redesigning the Orasis(R) and plan to introduce a new version in 2002. In
addition, the Company introduced a prototype of a Vehicle Mountable Docking
Station (VMDS), which can be used as an accessory product for the Orasis(R)
Toward the end of 1999, we identified set-top boxes as a focus for
product development. The OraLynx(TM) set-top box is an electronic device that
converts digital signals into a user acceptable format via other electronic
devices such as television sets, telephones and computers. It is a routing
device that enables you to access and transmit information to take advantage of
services offered by television, telephone, Internet and other providers of
communication, information or entertainment content or media. For example, you
may connect a set-top box to your television to receive cable television
programming and music broadcasts through your television and home sound system.
You may also connect a set-top box to a computer or various office equipment to
serve a variety of commercial uses. Throughout 2000 and 2001, the "Company"Company has
successfully developed multiple versions of its OraLynx(TM) set-top box and is
continuing its further development. The Company has received a contract from the
Hellenic Telecommunications Organization, S.A. (OTE) for the production and sale
of set-top boxes and as of the writing of this registration statement has
shipped 1,100 set-top boxes to them.
In August 2000, the Company acquired the net assets of T & B Design,
Inc. (f/k/a Advanced Digital Designs, Inc.) ("ADD"). ADD performs design
services, process methodology consulting and intellectual property development
for a variety of technology companies. The Company's engineers specialize in
this
Prospectus means Dauphin Technology,telecommunications, especially wireless
5
and cable-based product development, as well as multimedia development,
including digital video decoding and processing.
In July 2001, the Company purchased the net assets of Suncoast Automation,
Inc. ("Suncoast") from ProtoSource Corporation. Suncoast is a provider of
private, interactive cable systems providing bundled services of basic cable TV,
premium programming, video games and high-speed Internet access to the extended
stay hospitality industry. The Company currently has contracts for the
installation of over 3,200 units in the time share resort industry. Completion
of these installations is contingent upon receiving adequate funding for the
purchase of the equipment.
Recent Developments
On September 28, 2001, the Company entered into a Securities Purchase
Agreement with Crescent International Ltd., an Illinois corporation.
Theinstitutional investor managed by
GreenLight (Switzerland) SA, that allows us to issue and sell to Crescent and
requires Crescent to purchase, at our sole discretion, equity and debt
securities for consideration of up to $10 million (minus applicable fees and
expenses). Under the Securities Purchase Agreement, we received $2.5 million in
exchange for a Convertible Note and may receive up to $7.5 million in exchange
for additional securities. In addition, the Company issued warrants exercisable
to purchase 700,000 shares of common stock at a price of $1.3064 per share for a
five-year term and the Company may be required to issue additional warrants
under certain circumstances. See "Recently Issued Securities" on page 15.
Our Strategy
Our goals are to capture the opportunity presented by the Orasis(R) and
OraLynx(TM) products and to become a leading provider of niche electronic
products. In addition, we intend to successfully compete for additional
contracts for the installation of private, interactive cable systems. Our
strategy is presently headquarteredto develop or acquire a variety of products and services that
complement each other or offer us production and operating economies. In this
way, we seek to minimize the risk presented by reliance upon any given product
that may become obsolete through technological change.
We expect to increase our development, production and marketing
capabilities by increasing staff and coordinating relationships with outside
manufacturers and sales representatives. We will then establish a responsive
level of production and distribution. At the same time, we have begun an
aggressive marketing campaign to seize opportunities in the growing set-top box
and hand-held computer markets.
General
Our principal executive offices are located at 800 E.East Northwest Hwy.,Highway,
Suite 950, Palatine, Illinois 60067. The corporate phone60074, and our telephone number is (847) 358-
4406.
THE COMPANY
The Company was founded to design, manufacture and market mobile
computing systems, including laptop, notebook, hand-held and pen-based
computers, components and accessories. From 1988 through 1992, the
Company functioned primarily as358-4406.
Our website is located at www.dauphintech.com. Information contained on our
website is not a development-stage company.
Historically, the Company marketed its products directly and through
other distribution channels to both the commercial and government
segments.
In early 1993, the Company introduced the Desk-Top Replacement ("DTR"),
a pen-based hand-held computer with fax/modem features that was
considered a leading edge product for commercial applications. Sales of
the DTR did not meet the Company's expectations and financial problems
developed. On January 3, 1995, the Company filed a petition for relief
under Chapter 11 of the Federal Bankruptcy Code in the United States
Bankruptcy Court for the Northern District of Illinois, Eastern
Division. The Company operated under Chapter 11 as a Debtor-in-
Possession until July 23, 1996 when it was discharged as Debtor-in-
Possession and bankruptcy proceedings were closed.
Before it emerged from bankruptcy, the Board of Directors was
reconstituted and a new management team was recruited. Individuals with
strong engineering and manufacturing backgrounds, as well as finance,
accounting, sales and marketing skills, were hired. This new
management formulated a strategic plan to diversify the Company's
operations to eliminate dependence on a single product line or industry.
The plan incorporated a focus on hand-held mobile computer products,
coupled with targeted acquisitions in the technology sector, to create a
technology company with synergistic, self-managed wholly-owned
subsidiaries. The subsidiaries are intended to share resources and
cross-market products and engineering, contract manufacturing and
product development services.
As part of its management's plan, the Company reintroduced its DTR and
in the process devised its new OrasisTM hand-held computer line, which
management expects to supercede the DTR.
Based upon customer feedback received during the reintroduction of the
DTR, management decided to supplement the Company's computer product
line with a new model that could provide greater performance,
functionality, expandability and battery life capacity. In July, 1997,
the Company contracted with several firms specializing in electronics
engineering, packaging, mechanical and industrial design to develop the
OrasisTM hand-held computer. The OrasisTM computer features high-end
performance using 133 megahertz Pentium processor, upgradeable to 233
megahertz Pentium MMX, 32 megabytes of RAM, and 1.6 and 2.1 gigabit
hard drive options, while weighing less than 3 pounds. Standard unit
features include infra-red keyboard, electro-magnetic pen, standard two
type II or single type III PCMCIA slot, five screen options, and built-
in speaker and microphone (including sound blaster for voice
recognition and multi-media). Management believes that the OrasisTM
model will be the lightest, most versatile hand-held computer on the
market. Prototypes of the OrasisTM computer were introduced to the
public at COMDEX in November, 1997 and a limited number of pre-
production models has been completed and demonstrated to potential
customers for marketing purposes. Based on responses received at COMDEX,
management expects OrasisTM to supercede the DTR product line.
Management presently expects OrasisTM to be in production during the
second quarter of 1998.
During the Spring of 1997, the Company began negotiations which
culminated in June, 1997, with the acquisition, through a stock-for-
stock exchange, of all outstanding shares of stock in R. M. Schultz &
Associates, Inc., an Illinois corporation ("RMS"). RMS is an
electronics contract manufacturing firm. It operates from a 53, 000
square foot facility located in McHenry, Illinois from which it provides
engineering, testing and contract manufacturing services.
Currently, RMS serves several large commercial enterprises, as well as,
numerous small and medium sized firms. The Company has advanced over
$1,400,000, and has guaranteed $400,000 in borrowings, to upgrade RMS
facilities by installing a more advanced electronic assembly line and to
provide working capital for operations. Management believes the
Company's investment in RMS will create a manufacturing and engineering
"one-stop shop" capable of providing expanded and additional services
to present customers while attracting new and larger customers.
On September 8, 1997, the Company executed a letter of understanding to
acquire CADserv Corporation, an Illinois corporation ("CADserv").
CADserv is an electronics design services firm located in Schaumburg,
Illinois, and engaged in the design of printed circuit boards ("PCBs"),
engineering services and sub-contracting of PCB manufacturing and
electronic assembly. The proposed acquisition is conditioned upon Board
of Directors' approval and procurement of necessary financing. It has
not yet been presented to the Board. As of the date hereof, no
valuation or price has been determined and no definitive agreements have
been entered.this prospectus.
THE REGISTRATION
Total Number of Common
Shares to be Registered byregistered 6,605,977 shares
Total number of shares outstanding
immediately after the
Company......................... 2,964,327 Shares
Total Number of Common Shares to be
Registered by the Selling Stockholders............ 4,523,608 Shares
Total Number of Common Shares Outstanding
Immediately After the Registration................ 36,305,096registration 71,656,566 shares
Use of Proceeds to the Company.....................proceeds The Company will not receive noany
proceeds from this registration, of Shares other
than the proceeds
derived from the 2,964,327 Sharespossible exercise of
warrants to purchase 700,000 shares of
common stock at $1.3064 per share. Any
proceeds received from the exercise of
warrants will be sold at a later date by the
Officers and Directors of the Company without the use of a broker-dealer
or underwriter and without compensation.
Trading Symbol..................................... DNTKused for general
corporate purposes.
6
SUMMARY FINANCIAL INFORMATION
(In thousands, except per share data)
The following financial information has been derived fromtable summarizes the audited
financial statements and other records of the Company. The summaryconsolidated financial data for our
business. You should be read in conjunctionthe following summary consolidated financial data
together with "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS,"Management's Discussion and Analysis of Financial Condition and
Results of Operations," theand our Consolidated Financial Statements and
accompanying Notes contained
inbeginning on page F-1 of this Prospectus.prospectus.
Three
months ended
Year Endedended December 31, 1993 1994 1995 1996March 31,
(amounts in thousands, except per share amounts) (unaudited)
INCOME STATEMENT DATA: 1997 1998 1999 2000 2001 2002 2001
---- ---- ---- ---- ---- ---- ----
INCOME STATEMENT DATA:
Revenues $ 23,5612,730 $ 9,6035,368 $ 1832,279 $ 94860 $ 2,7302,620 $ 152 $ 445
Cost of Sales 22,005 47,867 94 279 4,345 5,758 4,834 2,876 2,745 504 328
------- ------- ------- ------- -------- ------- ----- ---------- -------
Gross Profit (Loss) 1,556 (38,264) 89 (185) (1,615) Loss before Extraordinary Item (3,398) (49,173) (795) (1,397)(390) (2,555) (2,016) (125) (352) 117
Net (Loss) (3,988) Extraordinary Items - - - 38,065 -(6,132) (9,306) (7,515) (13,252) (1,932) (1,105)
EARNINGS PER COMMON SHARE(1):
Net Income (Loss) (3,398) (49,173) (795) 36,668 (3,988)
EARNINGS PER COMMON SHARE (1):
Loss Before Extraordinary Item (0.24) (3.41) (0.06) (0.06) (0.13) Extraordinary Item - - - 1.58 -
-------- ------- ----- ---- -------
Net Income (Loss) (0.24) (3.41) (0.06) 1.52(0.16) (0.20) (0.13) (0.21) (0.03) (0.02)
As of
As of December 31, 1993 1994 1995 1996 1997March 31,
------------------ ---------
(unaudited)
BALANCE SHEET DATA: 1997 1998 1999 2000 2001 2002 2001
---- ---- ---- ---- ---- ---- ----
Total Assets 15,838 298 426 3,402 7,6297,269 6,719 3,372 11,161 3,917 3,123 10,158
Long Term Debt - - - 43 346430 303 185 102 1,197 1,671 84
Working Capital (Deficit) (2,123) (50,167) (49,968) 3,020 4,4274,511 260 (917) 3,015 680 (212) 2,480
Stockholders Equity (Deficit) (850) (50,028) (50,910) 3,093 5,676 2,885 552 10,521 2,049 604 9,610
(1) Income(Loss)Income (Loss) per common share is calculated based on the weighted average
number of Common Shares at December 31, 1993, 1994, 1995, 1996,shares for the respective period.
RISK FACTORS
Investment in our shares is risky and 1997 were 14,137,100; 14,408,354; 14,408,354; 24,076,301; and
30,734,045, respectively.
USE OF PROCEEDS
The Company will receive no proceeds from any sale of Shares by the
Selling Stockholders. The Company intends to use proceeds of Shares
registered for its sale to pay for future acquisitions, to raise
capital, if needed, to fund production of the OrasisTM hand-held
computer and RMS contract manufacturing operations, and to expand the
Company's employee benefits and product and service offerings. At the
present time, the Company is not engaged in any material negotiations
with any specific enterprise regarding any acquisition, other than
CADserv.
DILUTION
As andshould be considered speculative. In
addition to the extent, any Shares will be issued by the Company in
future transactions, current equityholders' ownership percentages will
de diluted.
FORWARD LOOKING STATEMENTS
Certain information contained in this prospectus, you should consider
carefully the following risk factors before investing in shares offered under
this prospectus. We operate in a highly competitive and volatile industry. We
are faced with aggressive pricing by competitors; competition for necessary
parts, components and supplies; continually changing customer demands and rapid
technological developments; and risks that buyers may encounter difficulties in
obtaining governmental licenses or incorporated by reference into this
Prospectus may be deemedapprovals, or in completing installation and
construction of infrastructure, necessary to be forward-lookinguse our products or to offer them
to end users. The following cautionary statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934 and is subject to the "Safe Harbor"
provisions of those sections. This information includes, without
limitation, statements concerning future revenues, future earnings,
future costs, future margins and future expenses; pending or future
acquisitions or corporate combinations; plans for expansion;
anticipated technological advances; future capabilities of the Company
to integrate and effectively manage acquired business operations; the
outcome of and any liabilities resulting from any claims, investigations
or proceedings against the Company or its subsidiaries; future levels of
dividends (if any); the future mix of business; and future operations,
future product demand, future industry conditions, future capital
expenditures and future financial condition. These statements are based
on current expectations and involve a number of risks and uncertainties.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to be correct.
When used in or incorporated by reference into this Prospectus, the
words "anticipate," "estimate," "expect," "may," "project" and similar
expressions are intended to be among the statements that identify
forward-looking statements. Importantdiscuss certain important
factors that could affect the
Company's actual results and cause actual results to differ materially from thosethe projected
results that might be projected, forecast, estimated or
budgeted bycontained in the Company in such forward-looking statements include, but
are not limitedcontained in this
prospectus.
Risks Related to ,Our Financial Results and/or Condition
7
We have an accumulated deficit due to substantial losses incurred over the following: fluctuations inlast
six years.
Since July 1996 we have operated without substantial sales or revenue and have
an accumulated deficit of $59,594,000 as of December 31, 2001. The Company
expects to incur operating levels atlosses over the near term. The Company's ability to
achieve profitability will depend on many factors including the Company's
facilities; retentionability to manufacture and financial condition of major
customers; effects of future costs; collectibility of receivables; the
inherent unpredictability of adversarial or administrative proceedings;
effects of environmental and other governmental regulations; currency
exchange fluctuations; the price of and demand for hand-held computers
or related electronicsmarket commercially acceptable products, and future levels and timing of capital
expenditures.
These statements are further qualified by the Risk Factors identified
below. Many of the factors affecting revenues and costs are outside of
the control of the Company, including
general economic and financial
market conditions and governmental regulations and factors involved in
administrative and other proceedings.
RISK FACTORS
AN INVESTMENT IN THE SHARES BEING REGISTERED INVOLVES A HIGH DEGREE OF
RISK AND, THEREFORE, SHOULD BE CONSIDERED EXTREMELY SPECULATIVE. SHARES
SHOULD NOT BE PURCHASED BY PERSONS WHO CANNOT AFFORD THE POSSIBILITY OF
THE LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER AMONG THE OTHER FACTORS AND FINANCIAL DATA DESCRIBED
HEREIN THE FOLLOWING RISK FACTORS INHERENT IN AND AFFECTING THE BUSINESS
OF THE COMPANY:
BANKRUPTCY PROCEEDING On January 3, 1995, the Company filed a petition
for relief under Chapter 11 of the Federal Bankruptcy Code in the United
States Bankruptcy Court for the Northern District of Illinois, Eastern
Division. On May 9, 1996, the Company's Third Amended Plan of
Reorganization was approved by the creditors and shareholders and
confirmed by the Court. On July 23, 1996, the provisions of the Plan
having been implemented, the Company was discharged as Debtor-in-
Possession and the bankruptcy case was closed. The effect of this
bankruptcy proceeding on past or potential future customers, vendors or
employees cannot be determined. Though the Company is no longer a
Debtor-in-Possession in any bankruptcy proceeding, thereits set-top box. There can be no assurance that the Company will ever operate atachieve a
profitprofitable level of operations or if profitability is achieved, that an
investment in the Company will result in any gain to shareholders.
SIGNIFICANT HISTORICAL LOSSES The Company had significant operating
losses since its inception. Its emergence from bankruptcy in 1996
resulted in a one time addition to income, due to debt forgiveness and
not operations, recorded on books as an Extraordinary Gain of
$38,065,373. For the years ended December 31, 1996 and 1997, the
Company had income of $36,669,000 and a loss $3,988,000 respectively.
For the years ended December 31, 1993, 1994 and 1995, the Company had
losses of $3,398,000, $49,173,000 and $795,000, respectively.
ABSENCE OF COMBINED OPERATING HISTORY; INTEGRATING ACQUIRED OPERATIONS
The Company acquired RMS in June of 1997. Management also expects to
make other acquisitions it may from time to time consider appropriate
and complimentary to Company operations. The Company and RMS each has
operated as separate independent entities, and there can be
no assurance
that the Company will be able to integrate the operations of these
businesses successfully or to institute the necessary systems and
procedures, including accounting andsustained. Our financial reporting systems, to
manage the combined enterprise on a profitable basis. There can be no
assurance that management will be able to manage combined operations or
to realize or implement effectively its strategic plan for growth
through acquisitions and diversification. The pro forma combined
historical financial results of operations included in the Financial
Statements contained herein cover periods when the Company and RMS were
not under common control or management andperformance may not be indicative of the
Company's future financial or operating results. The inability of the
Company to integrate the other operations successfully would have a
material adverse effect on the Company's business financial condition
and results of operations and would make it unlikely thatdifficult for potential sources
of capital to evaluate the Company's
acquisition and diversification strategy will be successful.
THE COMPANY'S ACQUISITION STRATEGY The Company intends to grow through
acquisitions that management may from time to time consider appropriate
and complimentary to Company operations. The Company expects to face
competition for acquisition candidates, which may limit the numberviability of acquisition opportunities and may lead to higher acquisition prices.
There can be no assurance that the Company will be able to identify,
acquire or manage profitably additional businesses or to integrate
successfully any acquired businesses into the Company without
substantial costs, delays or other operational or financial
difficulties. Further, acquisitions involve a number of special risks,
including failure of the acquiredour business to achieve expected results,
diversion of management's attention, failure of the acquired business to
achieve expected results, failure to retain key personnel of the
acquired business and risks associated with unanticipated events or
liabilities, some or all of which could have a material adverse effect
on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that the Company or
other businesses acquired in the future will achieve anticipated net
sales and earnings.
ACQUISITION FINANCING The timing, size and success of the Company's
acquisition efforts and the associated capital commitments cannot be
readily predicted. The Company currently intends to finance future
acquisitions by using shares of its Common Stock for all or a
substantial portion of the consideration to be paid. If the Common
Stock does not maintain a sufficient market value, or if potential
acquisition candidates are otherwise unwilling to accept Common Stock as
part of the consideration for the sale of their businesses, the Company
may be required to utilize more of its cash resources, if available, to
initiate and maintain its plan for growth through diversification and
acquisitions. If the Company does not have sufficient cash resources,
its growth could be limited unless it is able to obtain additional
capital through debt or equity financings. However, there can be no
assurance that such line of credit will be sufficient or that the
Company will be able to obtain additional financing it may need for
management to implement its strategic plan for growth on terms that it
deems acceptable.
INTERNAL GROWTH AND OPERATING STRATEGIES Key elements of the
management's strategy is to improve the profitability of the Company and
subsequently acquired businessdate and to continue to expand the net salesassess its
future viability.
None of the Company andour products have achieved widespread distribution or customer
acceptance nor are there any subsequently acquired businesses. Although the
Company intends to seek to improve the profitability of its operations
and any subsequently acquired businesses by various means, including
realizing overhead, marketing and purchasing efficiencies, there can be
no assurances that the Company will be able to
do so. The Company's
ability to increase the net sales will be affected by various factors,
including demand forprofitably sell its electronic products and related design and
manufacturing services, pricing and availability of raw materials, the
Company's ability to expand the range of products and services offered
by it and any subsequently acquired businesses and the Company's ability
to successfully enter new markets. Many of these factors are beyond the
control of the Company, and there can be no assurance that the Company's
strategies will be successful or that it will be able to generate cash
flow adequate for its operations and to support internal growth. A key
component of the Company's strategy is to conduct its operations, and
operations of subsequently acquired businesses, on a decentralized
basis, with local management retaining responsibility for day-to-day
operations, profitability and the growth of the business. If proper
overall business controls are not implemented, this decentralized
operating strategy could result in inconsistent operating and financial
practices at the Company and subsequently acquired businesses and the
Company's overall profitability could be adversely affected.
CONTROL BY EXISTING MANAGEMENT The Company's Directors and Executive
Officers, and entities affiliated with them, beneficially own
approximately 7,422,099 of the outstanding shares of Common Stock.
These holders of Common Stock will control in the aggregate
approximately 20% of the votes of all shares of Common Stock, and, if
acting in concert, will be able to substantially influence the Company's
affairs, the election of Directors and the outcome of any matter
submitted to a vote of stockholders.
PRODUCTION CAPITAL REQUIREMENTS As noted above, the Company must obtain
additional capital for acquisition and working capital purposes.
However, it also must obtain capital for successful production of the
OrasisTM computers and any other computer products it may develop or
hope to develop in the future. Such production costs will be
substantial. Possible sources of capital could come from operating
revenue, from bank borrowing, or from the sale of the Company's debt or
equity securities. There can be no assurance that the Company will be
able to obtain the capital necessary to conclude production of the
OrasisTM computers, or any of such other products, and any failure to
obtain such capital would have a material and adverse impact on the
Company's financial condition and results of operation.
POSSIBILITY OF LOSS OF ENTIRE INVESTMENT An investment in the Company
is extremely speculative and involves a very high risk. As stated
elsewhere herein, the Company was in bankruptcy, has operated at a
significant loss since its inception and at the present time has limited
business operations. The possibility exists that the Company will never
be successful and that an investment in the Company will result in a
total loss to the investor. No person should invest in the Company
unless such person can afford the total loss of his or her investment.
COMPETITION The Company's primary business is the design, manufacture
and sale of hand-held personal computers and provision of contract
manufacturing services through its wholly-owned subsidiary, RMS. Both
industries are highly competitive and are affected by frequent
introduction of new or improved products. Continuous improvement in
product price/performance characteristics is the key to future success
in both industries. At all levels of competition, pricing has become
very aggressive, and the Company expects pricing pressures to continue
to be intense. Many of the Company's competitors have significantly
greater financial, marketing, manufacturing resources, broader product
lines, brand name recognition and larger existing customer bases than
the Company. There can be no assurance that the Company will be able to
compete in any new market in which it enters.
OBSOLESCENCE OF TECHNOLOGY In the computer industry, hardware and
software products and technology are subject to rapid change, and the
Company's future success will depend on its ability to successfully
introduce enhancements to its present products and to develop new products.
The Company must produce products that are technologically
advanced and are comparable to and competitive with those made by
others. Otherwise, the Company's products may become obsolete. There can
be no assurance that the Company's products will not be rendered
obsolete by changing technology or that it will be able to continue to
respond to such advances in technology inOrasis(R) is a manner as to be commercially
successful.
UNCERTAINTY OF MARKET ACCEPTANCE The OrasisTM computers are solutionssolution oriented, pen-based, mobile computer systems, each ofsystem, which
has been produced and marketed only on a limited basis. AsThe Company has not
recognized significant sales of the marketproduct. A new version of the Orasis(R) is
under development and applicationsscheduled for such computer systems has increased,release in 2002/2003.
We began shipping the Company
anticipates its market will increase; however, there is no assurance
that such trend will continueOraLynx(TM) set-top box late in the future. Whilefourth quarter of
2001. We believe the Company believes
that OrasisTM may offer advantages over competition, no assurance can
be given that OrasisTMOraLynx(TM) set-top box will attain any degree ofaddress a broad market acceptance or
that it will generate revenues sufficient for profitable operations.
AVAILABILITY OF COMPONENTS The Company's products are manufactured
and/or fabricated from various component parts, such as PCBs, microchips
and fabricated metal parts. The Company must obtain such components from
third-party vendors. The Company's reliance on those manufacturers and
vendors, as well as industry component supply, yields many risks
including, but not limited to, the possibility of a shortage of
components, increases in component costs, component quality, reduced
control over delivery schedules and potential manufacturer/vendor
reluctance to extend credit with the Company due to its recent
bankruptcy. In the event that there is a shortage of component parts or
that the costs of these parts substantially increases, the operations of
the Company and its success in the marketplace could be materially and
adversely affected.
DEPENDENCE ON KEY PERSONNEL The success of the Company and of its
business strategy is dependent in large part on its key management and
operating personnel. The Company believes that its future success will
also depend on its ability to retain the services of its Executive
Officers. The Company will also have an ongoing need to expand its
management personnel and support staff. The loss of the services of one
or more members of management or key employees or the inability to hire
additional personnel as needed may have a material adverse effect on the
Company.
DEPENDENCE ON PROPRIETARY TECHNOLOGY The Company relies on a
combination of trade secrets, copyright and trademark laws, non-
disclosure and other contractual provisions, and technical measures to
protect its proprietary rights in its products.demand.
There can be no assurance that these protectionsa market demand will exist or the sales of the
OraLynx(TM) will continue after first being introduced. If a market demand
exists, it may be adequatemet with alternative products offered by competitors or with
pricing that we cannot match.
Availability of additional funding under our Securities Purchase Agreement
requires the Company's
competitors will not independently develop technologies that are
substantially equivalent or superiorCompany to its technology.meet certain conditions precedent, which the Company may
be unable to meet.
On September 28, 2001 the Company entered into a $10 million Securities Purchase
Agreement with Crescent International Ltd., an institutional investor. Under the
Securities Purchase Agreement, the Company issued a Convertible Note for $2.5
million. Although the Company believes that its products do not infringe uponhad the proprietary
rights of third-parties, there can beoption to issue further convertible notes
to Crescent subject to certain conditions precedent, such option expired on
February 1, 2002 and no assurance that third parties
will not assert infringement claims againstadditional notes were issued. In addition, the Company
in the future or
thatissued warrants exercisable to purchase 700,000 shares of common stock at a
license or similar agreement will be available on reasonable
terms in the eventprice of an unfavorable ruling on any such claim. In
addition, any such claim may require$1.3064 per share for a five-year term. The Stock Purchase Agreement
further permits the Company to incur substantial
litigation expensessell to Crescent up to $7.5 million in common
stock of the Company over a 24-month period. Additionally, the Company agreed
not to exercise any drawdowns against its then existing common stock purchase
agreement with Techrich International Ltd., which expired on January 28, 2002.
The Securities Purchase Agreement permits the Company to sell to Crescent and
requires Crescent to purchase from the Company, at the Company's sole
discretion, common stock of the Company for up to $7.5 million over a 24-month
period. Individual sales are limited to $1.5 million, or a higher amount if
agreed to by the Company and Crescent, and each sale is subject to our
satisfaction of the following conditions precedent (none of which are within the
control of Crescent): (1) the Company's representations and warranties must be
true and complete, (2) the Company must have one or more then currently
effective registration statements covering the resale by Crescent of all shares
issued in prior sales to Crescent and issuable upon the conversion of the
Convertible Note, (3) there must be no dispute as to the adequacy of disclosures
made in any such registration statement, (4) such registration statements must
not be subject to any stop order, suspension or withdrawal, (5) the Company must
have performed its covenants and obligations under the Securities Purchase
Agreement, (6) no statute, rule, regulation, executive order, decree, ruling or
injunction may have been enacted, entered, promulgated or adopted by any court
of governmental authority that would prohibit the Company's performance under
the Securities Purchase Agreement, (7) the company's common stock must not have
been delisted from its principal trading market and there must be no trading
suspension of its common stock in effect, and (8) the issuance of the designated
number of shares of common stock with respect to the applicable sale must not
violate the shareholder approval requirements of the Company's principal trading
market. The aggregate amount of all sale shares and convertible notes issued
cannot exceed $10 million. The amount of the sale is limited to twice the
average of the bid price multiplied by the trading volume during the 22 trading
day period immediately preceding the date of sale. When the total amount of
securities issued to Crescent equals or exceeds $5 million, then the Company
shall issue to Crescent a subsequent incentive warrant exercisable to purchase
400,000 shares of common stock at a price equal to the bid price on the date the
incentive warrant is issued.
Even though Crescent has no investment discretion with respect to shares of
common stock that the Company may
8
require it to significant liabilitiespurchase under the Securities Purchase Agreement, the Company may
not be able to satisfy one or more of these conditions at any time that could
have a material adverse effectit
desires to raise funds from Crescent.
The initial funding of $2.5 million combined with the $308,000 cash on its financial condition and results of
operations.
GENERAL ECONOMIC CONDITIONS General economic climate and conditions
impacthand at
September 30, 2001 will allow the operationsCompany to pay the subcontractors for the OTE
order, complete two installations at time-share resorts, complete the opening of
the Company. Adverse economic conditions could
havebranch office in Piraeus, Greece and provide working capital for operations.
Risks Relating to Our Shares
Shareholders may suffer dilution from this offering and from the effectexercise of
reduced demand for Company products, increasing
customer defaultsexisting options, warrants and increasing overall credit risks. The availability
of financing from banks, finance companies, insurance companies and
other sources may affectconvertible notes; the availability of funds necessary for
acquisitions, product development, production and marketing, and
operations in general. There can be no assurance that general economic
conditions will be such that the Companyterms upon which we will
be able to generate
significant revenuesobtain additional equity capital could be adversely affected.
Our common stock may become diluted if warrants and options to purchase our
common stock are exercised and if Crescent converts our outstanding $2,500,000
Convertible Note into shares of our common stock. The conversion price of
Crescent's Convertible Note is the lower of $1.1561 and a price based on a
formula determined at the time of conversion. We have limited rights to delay
conversion for up to 180 days from the date triggering those rights if the
conversion price determined by the formula is below $0.75 per share. At this
price, conversion by Crescent of its Convertible Note would result in the
issuance of 3,333,333 shares. We are required to register for resale shares
issued upon conversion of the Convertible Note to the extent they are not
registered under the registration statement of which this prospectus is a part.
As of June 11, 2002, the conversion price of the Convertible Note was $0.4233,
which would result in the issuance of 5,905,977 shares. Crescent has informed us
that it has no current intent to convert the Convertible Note into shares of our
common stock and that any decision as to whether to convert in full or operatein part
will be based on relevant facts, circumstances and market conditions existing at
the time of the decision.
In addition to the dilution resulting from a conversion of the Convertible Note,
we could be subject to further dilution upon exercise of a Protective Warrant,
if and when issued to Crescent. The number of shares of our common stock that
can be purchased upon exercise of the protective warrant is equal to the number
of shares of our common stock that is determined by subtracting the amount paid
by Crescent for its initial purchase of the Company's common stock, i.e.
$500,000, divided by the purchase price, from an amount which is equal to
$500,000 divided by the price of the common stock for the Company as computed on
the effective date of the Company's registration statement. Under the terms of
the Protective Warrant, if the price for the Company's common stock as computed
on the effective date of the registration statement filed on behalf of Crescent
is higher than the purchase price for the Company's common stock, as computed on
the date Crescent purchased such shares, the Protective Warrant does not become
exercisable.
Irrespective of whether Crescent exercises its warrants or converts its
Convertible Note, our common stock is subject to further dilution upon the
issuance of shares of our common stock to Crescent that could occur if we
require Crescent to purchase additional shares of our common stock for up to
$7,500,000. These additional shares would be at a profit.
GOVERNMENT REGULATIONS To a great extent,discount to the businessthen current
market price. The purchase price, with respect to the sale of common stock by us
to Crescent, is determined by taking the lower of $1.1561 and 92% of the Companyaverage
of the lowest three consecutive bid prices during the 22 trading day period
immediately preceding the applicable sale date. Dilution resulting from issuance
of said shares will depend on the trading price at the time the common stock is
dependentsold. Illustrations of such effect can be found on page 18. Under the terms of
our securities purchase agreement with Crescent, the number of shares to be
purchased by Crescent or to be obtained upon federal, stateexercise of warrants or conversion
of the Convertible Note held by Crescent cannot exceed the number of shares
that, when combined with all other shares of common stock and local government regulations.
Government regulations which interferesecurities then
owned by Crescent, would result in Crescent owning more than 9.9% of our
outstanding common stock at any given point of time. Our agreements with
Crescent obligate us to register any shares of our common stock that we require
Crescent to purchase. Neither Crescent nor any of its affiliates can directly or
indirectly engage in any short sale of the Company's business plancommon stock. See "Recently
Issued Securities" on page 15 for a more complete description of our agreements
with Crescent.
Because the amount of securities to be issued to Crescent is based on a formula
that is tied to the market price of our shares, issuance of these securities
could result in significant dilution of the per share amounts of our shares. The
inverse relationship between the price and the amount of securities to be issued
may have the following results:
. the lower the average trading price of our shares at the time we
request Crescent to purchase additional shares, the greater the number
of securities that can be issued, and the greater the risk of dilution
caused by these securities;
. the perceived risk of dilution may cause Crescent or other
shareholders to sell their shares, which could
9
contribute to a downward movement in the stock price of shares; and
. any significant downward pressure on the trading price of our shares
could encourage shareholders to engage in short sales, which could
further contribute to a price decline of our shares.
These shares, as well as the eligibility for additional restricted shares to be
sold in the future, either pursuant to future registrations under the Securities
Act of 1933, as amended, or an exemption such as Rule 144 under the Securities
Act of 1933, as amended, may have a dilutive effect on the market for the price
of our common stock. The terms upon which we will be able to obtain additional
equity capital could also be adversely affected. In addition, the sale of common
stock offered by this prospectus, or merely the possibility that these sales
could occur, could have an adverse effect on the future businessmarket price of our common
stock.
It is likely that our shares will be subject to substantial price and volume
fluctuations due to a number of factors, many of which will be beyond our
control.
The securities markets have recently experienced significant price and volume
fluctuations. The market prices and volume of securities of technology and
development-stage companies have been especially volatile. Market volatility and
other market conditions could reduce the Company.
DIVIDEND POLICY The Company hasmarket price for our shares despite
operating performance. In addition, if our operating performance falls below
expectations, the market price of our shares could decrease significantly. You
may be unable to resell shares at or above the registration price. In the past,
companies that have experienced volatility in the market price of their stock
have been the subject of securities class action litigation. If we were the
subject of such litigation we could experience substantial litigation costs and
diversion of management's attention and resources.
We have not paid any dividends and have no expectation of paying dividends in
the foreseeable future.
We have not declared, paid, noror distributed any cash dividends on its Common Stockour shares in
the past, nor are any cash dividends contemplated in the foreseeable future.
There is no assurance that the Company'sour operations will generate any profits from which
to pay cash dividends. Even if profits are generated through the Company's
operations in the
future, the Company'sour present intent is to retain any such profits within the foreseeable future, to be used for acquisitions,
product development, production and marketing, and for general working capital
requirements.
LIMITED PUBLIC MARKETOur shares are not widely traded.
There is only a limited market for the Company's
Common Stock.our shares. If a large portion of the Sharesshares
eligible for immediate resale after registration were to be offered for public
resale within a short period of time, the current public market would likely be
unable to absorb such Shares, whichshares. This could result in a significant reduction in
current market prices. There can be no assurance that investors will be able to
resell Sharesshares at the price they paid for the Sharesshares or at any price.
LIQUIDITY The Company believes that the funds it currently has on hand,
when coupled with anticipated operating revenues, and the funds that the
Company may be ableOur shares are subject to raise through the sale of Shares or registered or
private offering ofspecial trading rules relating to "penny stocks" which
restrict trading.
Our shares to the public, will be sufficient to fund
current and continuing operations; however, there can be no assurance
that such funds will be able to fund current and future operations.
BROKER-DEALER SALES OF COMPANY STOCK The Company's stock isare covered by a Securities and Exchange Commission Rulean SEC rule that impliesimposes additional sales practice
requirements on broker-dealers who sell "penny stock" to persons other than
certain established customers. For transactions covered by the rule, the
broker-dealer must obtain sufficient information from the customer to make an
appropriate suitability determination, provide the customer with a written
statement setting forth the basis of the determination and obtain a signed copy
of the suitability statement from the customer. Consequently, theThe rule may affect the ability
of broker-dealers to sell the Company's stockour shares and also may affect theyour ability of stockholders to sell
their stockshares in the secondary market.
Risks Related to Our Strategy
We may be unable to identify or acquire additional technologies or products to
diversify our product offering which could reduce our ability to generate
revenues.
One of our goals is to become a leading provider of niche electronic products.
We expect to avoid reliance upon any one given product through acquisition
and/or development of additional technologies and products. However, we may be
unable to identify or acquire technologies or products. In that case, we may
have to rely upon our own resources to develop such technologies and products
internally. We may not have sufficient resources to do this. In addition,
acquisitions involve a number of special risks, such as diversion of
management's attention and financing issues, which may have a negative impact on
operations and financial performance. The Company does not have any current
plans or proposals for any acquisitions at this time.
10
We may not be able to efficiently integrate any acquired technologies, products
or businesses which may require additional time by senior management and disrupt
our current business.
We will actively look to acquire technologies, products and other businesses to
complement our operations. There can be no assurance that we will be able to
integrate the operations of any other business successfully. Acquisitions we do
undertake will subject us to a number of risks, including the following:
. inability to institute the necessary systems and procedures, such as
accounting and financial reporting systems;
. assumption of debt;
. issuance of additional common stock, thereby diluting current
shareholders ownership;
. reallocation of managements time away from its current activities;
. failure to retain key personnel; and o assumption of unanticipated legal
liabilities and other problems.
In addition, we may acquire technologies or products that prove incompatible to
other products following further development.
Even if we successfully integrate acquired technologies, products or businesses,
the additional strain on management and current resources may prevent us from
effectively managing the growth.
We seek to become profitable by expanding sales of Orasis(R), the OraLynx(TM)
set-top box and any new products that we may develop or acquire. To manage
growth, we may be required to:
. improve existing and implement new operational, production and personnel
systems;
. hire, train and manage additional qualified personnel; and
. establish relationships with additional suppliers and strategic partners
while maintaining existing relationships.
The existing purchase orders received from international companies subjects us
to risks associated with international operation, such as collection of accounts
receivable, foreign currency fluctuations and regulatory requirements .
As we begin shipping under the purchase orders and set-top box agreement, we
risk exposure to international risks, including:
. greater difficulty in accounts receivable collection and longer
collection periods;
. unexpected changes in regulatory requirements;
. foreign currency fluctuations;
. reduced protection of intellectual property rights;
. potentially adverse tax consequences; and
. political instability.
At the present time, the Company is only currently operating in one foreign
country, Greece. However, as the Company continues to grow and develop,
expansion may very well occur in other countries, primarily in Europe.
Risks Related to Development, Production and Marketing of Our Products
The Company has developed two products in five years and the future of the
Company will be affected by the success of these products.
From June of 1997 through June of 1999, the Company was principally engaged in
research and development activities involving the hand-held computer. Since
then, the Company has been working on new technologies, in particular the design
and development of the set-top boxes. The Company's products have been sold in
limited quantities and there can be no assurance that a significant market will
develop for such products in the future. Therefore, the Company's inability to
develop, manufacture and market its products on a timely basis may have a
material adverse effect on the Company's financial results.
11
Product development involves substantial expense and resource allocation that
may exceed our capabilities.
We incurred substantial expense in developing the Orasis(R) computer. We expect
to continue to develop enhancements and accessory equipment to meet customer and
market demands. The OraLynx(TM) set-top box is in the final development stage.
Although we anticipate further expense associated with the final stage of
development, it will not be substantial. However, delays in development arising
from insufficient cash or personnel resources will hinder our ability to bring
these products to market before competitors introduce comparable products. In
that case, we will miss the opportunity to capitalize on the technological
advances, which we believe such products may offer.
We depend on outside sources for components and may be harmed by unavailability
of components, excessive prices for components or unexpected delays in component
deliveries.
The Orasis(R) and OraLynx(TM) set-top box use or will use various component
parts, such as PCBs, microchips and fabricated metal parts. We must obtain these
components from manufacturers and third-party vendors. While we do not
anticipate any possible delays or problems in securing parts, our reliance on
those manufacturers and vendors, as well as industry component supply, may
create risks including the following:
. the possibility of a shortage of components;
. increases in component costs;
. variable component quality;
. reduced control over delivery schedules; and
. potential manufacturer/vendor reluctance to extend credit to us.
Additionally, we are currently utilizing the services of a subcontractor for the
manufacture of our OraLynx(TM) set-top box. If this subcontractor is unable to
meet our requests for product, or if there is a shortage of component parts or
if the cost of these parts substantially increases, our operations and our
success in the marketplace could be materially and adversely affected. The
Company has secured alternative subcontractors and vendors, should our current
sources be unavailable. However, similar risks are present with these
alternative sources.
Errors or defects in our products could result in customer refund or product
liability claims causing an impact on market penetration, acceptance of our
products, profitability and on the cash flow of the Company.
Because our products are complex, they could contain errors or bugs that can be
detected at any point in a product's life cycle. While we continually test our
products for errors and will work with customers to identify and correct bugs,
errors may be found in the future. Although many of these errors may prove to be
immaterial, any of these errors could be significant. Detection of any
significant errors may result in:
. loss of or delay in market acceptance and sales of our products;
. diversion of development resources;
. injury to our reputation; or
. increased maintenance and warranty costs.
Errors or defects could harm our business and future operating results. With
defective products, our market share would be negatively impacted and the
Company would lose substantial future revenue. Moreover, because our products
will be used in critical computing functions, we may receive significant
liability claims if our products do not work properly. Our agreements with
customers typically do and will contain provisions intended to limit our
exposure to product liability claims. However, these provisions may not preclude
all potential claims. Liability claims could require us to spend significant
time, money and effort in litigation. They also may result in substantial damage
awards. Any such claim, whether or not successful, could materially damage our
reputation, cause a strain on our results of operation with the lack of revenue
and additional expenses, and burden management resources by focusing efforts on
the errors or defects as opposed to product development and growth.
We will be unable to develop, produce and market our products without qualified
professionals and seasoned management.
Our success depends in large part on our ability to recruit and retain
professionals, key management and operating
12
personnel. We need to complete development of the OraLynx(TM) set-top box,
continue to develop and modify the Orasis(R) and coordinate production of
Orasis(R) computers and the OraLynx(TM) set-top box. We also need to develop
marketing channels to increase market awareness and sales of our products.
Qualified professionals, management and operating personnel are essential for
these purposes. Such individuals are in great demand and are likely to remain a
limited resource in the foreseeable future. Competition for them is intense and
turnover is high. If we cannot attract and retain needed personnel, we will not
succeed.
We believe that our future success will depend on our ability to retain the
services of our executive officers. These officers have developed industry
relationships that are critical to our growth and development. They also will be
essential in dealing with the significant challenges that we expect will arise
from anticipated growth in our operations.
We have an ongoing need to expand management personnel and support staff. The
loss of one or more members of management or key employees, or the inability to
hire additional personnel as needed, could have a material adverse effect on our
operations.
Risks Related to Competition within Our Industry
Competition in our industry is intense and we may not be able to compete
successfully due to our limited resources.
Our industry is highly competitive and dominated by competitors with substantial
resources. Continuous improvement in product pricing and performance is the key
to future success. At all levels of competition, pricing has become very
aggressive. We expect pricing pressure to continue to be intense. Many of our
competitors are larger and have significantly greater financial, technical,
marketing and manufacturing resources. They also have broader product lines,
greater brand name recognition and larger existing customer bases. As a result,
our competitors may be better able to finance acquisitions or internal growth or
respond to technological changes or customer needs.
Current and potential competitors also have established or may establish
cooperative relationships among themselves or with third parties to increase
their ability to address customer needs. There can be no assurance that we will
be able to compete successfully in developing, manufacturing or marketing our
products. An inability to do so would adversely affect our business, financial
condition and market price of our shares.
Our industry is subject to rapid technological change and we may not be able to
keep up.
Rapid technological change, frequent new product introductions and enhancements,
uncertain product life cycles and changes in customer demands and evolving
industry standards, characterize the computer industry. Our products could
become obsolete if products based on new technologies are introduced or if new
industry standards emerge.
Computer equipment is inherently complex. As a result, we cannot accurately
estimate the life cycles of our products. New products and product enhancements
can require long development and testing periods, which requires retention of
increasingly scarce technically competent personnel. Significant delays in new
product releases or significant problems in installing or implementing new
products can seriously damage our business. In the past, we have experienced
delays in scheduled product introductions and cannot be certain that we will
avoid similar delays in the future. We must produce products that are
technologically advanced and comparable to and competitive with those made by
others. Otherwise, our products may become obsolete or we will fail to achieve
market acceptance.
Our future success depends on our ability to enhance existing products, develop
and introduce new products, satisfy customer requirements and achieve market
acceptance. We cannot be certain that we will successfully identify new product
opportunities and develop and bring new products to market in a timely and
cost-effective manner. We may sell fewer products if other vendors' products are
no longer compatible with ours or other vendors bundle their products with those
of our competitors and sell them at lower prices.
Our ability to sell our products depends in part on the compatibility of our
products with other vendors' software and hardware products. For example,
Orasis(R) will not sell if it cannot run software, or access resources such as
Internet or telephone services provided by others. The same is true for the
set-top box. Other vendors may change their products so that they will no longer
be compatible with our products. These vendors also may decide to bundle their
products with products of our competitors for promotional purposes and to
discount the sales price of the bundled products. If this were to occur, our
business and future operating results could suffer.
13
We have limited intellectual property protection and our competitors may be able
to appropriate our technology or assert infringement claims.
Our products are differentiated from those of our competitors by our internally
developed technology that is incorporated into our products. If we fail to
protect our intellectual property, others may appropriate our technology and
sell products with features similar to ours. This could reduce demand for our
products. We rely on a combination of trade secrets, copyright and trademark
laws, non-disclosure and other contractual provisions with employees and third
parties, and technical measures to protect our proprietary rights in our
products. There can be no assurance that these protections will be adequate or
that our competitors will not independently develop technologies that are
substantially equivalent or superior to ours.
We believe that our products do not infringe upon the proprietary rights of
third parties. However, there can be no assurance that third parties will not
assert infringement claims against us in the future or that a license or similar
agreement will be available on reasonable terms in the event of an unfavorable
ruling on any such claim. In addition, any such claim may require us to commit
substantial time and effort, and to incur substantial litigation expenses, and
may subject us to significant liabilities that could have a material adverse
effect on our financial condition and results of operations.
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. Any statement that is not a statement of
historical fact constitutes a forward-looking statement. You can identify these
statements by forward-looking words such as "may", "will", "intend", "believe",
"anticipate", "estimate", "expect", "project" and similar words. You should read
statements that contain these words carefully because they discuss our future
expectations, contain projections of our future results of operation and of our
financial condition or state other forward looking information. This prospectus
also includes third party estimates regarding the size and growth of markets and
mobile computer equipment usage in general.
You should not place undue reliance on these forward-looking
statements. The sections captioned "Risk Factors" and "The Company" as well as
any cautionary language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from our expectations.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. We are under no duty to update
any of the forward looking statements after the date of this prospectus or to
conform these statements to actual results or to changes in our expectations,
except with respect to material developments related to previously disclosed
information.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the SEC. You can read and copy these reports, proxy
statements and other information at the SEC's public reference room at 450 Fifth
Street, N.W., Judiciary Plaza, Washington D.C. Copies of such materials can be
obtained from the public reference room at prescribed rates. You can obtain
information regarding operation of the public reference room by calling the SEC
at 1-800-SEC-0330. Such material can also be inspected and printed from the
SEC's Internet site located at http://www.sec.gov.
USE OF PROCEEDS
All net proceeds from the sale of the common stock covered by this
prospectus will be received by the selling shareholder. We will not receive any
proceeds from the sale of the common stock by the selling shareholder other than
14
from the possible exercise of warrants to purchase 700,000 shares of common
stock at $1.3064 per share. Any proceeds received from the exercise of warrants
will be used for general corporate purposes.
RECENTLY ISSUED SECURITIES
On September 28, 2001 the Company entered into a $10 million Securities Purchase
Agreement with Crescent International Ltd., an institutional investor. Under the
Securities Purchase Agreement, the Company issued a Convertible Note for $2.5
million. Although the Company had the option to issue further convertible notes
to Crescent subject to certain conditions precedent, such option expired on
February 1, 2002 and no additional notes were issued. In addition, the Company
issued warrants exercisable to purchase 700,000 shares of common stock at a
price of $1.3064 per share for a five-year term. The Stock Purchase Agreement
further permits the Company to sell to Crescent up to $7.5 million in common
stock of the Company over a 24-month period. Additionally, the Company agreed
not to exercise any drawdowns against its then existing common stock purchase
agreement with Techrich International Ltd., which expired on January 28, 2002.
The Securities Purchase Agreement permits the Company to sell to Crescent and
requires Crescent to purchase from the Company, at the Company's sole
discretion, common stock of the Company for up to $7.5 million over a 24-month
period. Individual sales are limited to $1.5 million, or a higher amount if
agreed to by the Company and Crescent, and each sale is subject to our
satisfaction of the following conditions precedent (none of which are within the
control of Crescent): (1) the Company's representations and warranties must be
true and complete, (2) the Company must have one or more then currently
effective registration statements covering the resale by Crescent of all shares
issued in prior sales to Crescent and issuable upon the conversion of the
Convertible Note, (3) there must be no dispute as to the adequacy of disclosures
made in any such registration statement, (4) such registration statements must
not be subject to any stop order, suspension or withdrawal, (5) the Company must
have performed its covenants and obligations under the Securities Purchase
Agreement, (6) no statute, rule, regulation, executive order, decree, ruling or
injunction may have been enacted, entered, promulgated or adopted by any court
of governmental authority that would prohibit the Company's performance under
the Securities Purchase Agreement, (7) the company's common stock must not have
been delisted from its principal trading market and there must be no trading
suspension of its common stock in effect, and (8) the issuance of the designated
number of shares of common stock with respect to the applicable sale must not
violate the shareholder approval requirements of the Company's principal trading
market. The aggregate amount of all sale shares and convertible notes issued
cannot exceed $10 million. The amount of the sale is limited to twice the
average of the bid price multiplied by the trading volume during the 22 trading
day period immediately preceding the date of sale. When the total amount of
securities issued to Crescent equals or exceeds $5 million, then the Company
shall issue to Crescent a subsequent incentive warrant exercisable to purchase
400,000 shares of common stock at a price equal to the bid price on the date the
incentive warrant is issued.
Convertible Note Issued to Crescent International
On October 2, 2001, in accordance with the Securities Purchase
Agreement, the Company issued a Convertible Note to Crescent in the amount of
$2,500,000, due September 28, 2004. The Company is not required to pay interest
on the Note unless the Company fails for a period of 10 trading days to issue
shares upon conversion or pay the remaining principal of the Note upon maturity
or redemption. If the Company fails to issue shares or pay the
remaining principal upon maturity or redemption, interest shall be payable at a
fixed rate of 8% per annum, payable in quarterly installments, on the
outstanding principal balance immediately prior to the date of conversion, until
the Note is fully converted or redeemed.
The Company retains the right to redeem the Convertible Note upon 30 days notice
at a price of 110% during the first year of its issuance, 120% during the second
year and 130% thereafter. Additionally, the Company can require the conversion
of the note into shares of our common stock if we satisfy each of the following
requirements:
. The shares of our common stock issuable upon conversion of the
Convertible Note may be sold by Crescent without registration and
without any time, volume or manner limitations pursuant to Rule
144 (or any similar provision then in effect) under the Securities
Act of 1933;
. The bid price for each of the 22 trading days immediately
preceding the date of notice of a required conversion is delivered
by the Company to Crescent is at least $1.881 (190% of Bid Price
on Subscription Date);
15
. Unless otherwise agreed to in writing by Crescent, the number of
shares of our common stock issuable upon such required conversion
of the Convertible Note is less than twice the average of the
daily trading volume during the 22 trading day period immediately
preceding the date of notice of a required conversion is delivered
by the Company to Crescent;
. At least 22 trading days have elapsed since a conversion date
relating to a prior conversion required by the Company or
Crescent; and
. No shares are subject to any shareholder agreements, lock-up
provisions or restrictions on transfer of any kind whatsoever.
The holder of the Note may convert the Note in whole or in part to common stock
of the Company at any time at the lower of $1.1561 or the average of the lowest
three consecutive bid prices during the 22 days preceding the date of
conversion. The conversion price and the number of note conversion shares is
subject to certain standard anti-dilution adjustments including
reclassification, consolidation, merger or mandatory share exchange; subdivision
or combination of shares; stock dividends; and the issuance of additional
capital shares by us at prices less than the conversion price.
We have the right to reject any conversion if the average bid price of our
common stock during the seven trading days preceding the delivery date of
Crescent's conversion notice is less than $0.75 per share. This right expires
120 days after it is first exercised by us. Based upon this provision, the
maximum number of shares of our common stock that we may be required to issue
upon the conversion of the Convertible Note would be 3,333,333 shares assuming
the conversion price is $0.75 per share.
In furtherance of this transaction, the Company entered into a registration
rights agreement, whereby it is required to file a registration statement, of
which this prospectus is a part, on behalf of Crescent with respect to the note
conversion shares and warrant shares issuable pursuant to the warrants issued to
Crescent. Similar registration statements are to be filed for each subsequent
sale of securities to Crescent. The failure of the Company to obtain the
effectiveness of its registration statements as required under the registration
rights agreement may subject it to certain financial penalties.
Securities issuable to Crescent International
Under the Securities Purchase Agreement with Crescent International Ltd., we can
obtain, subject to applicable fees and expenses and the terms and conditions of
the agreement, an additional $7.5 million by selling up to 10,000,000 shares of
our common stock to Crescent at various points in time, beginning 22 days after
the registration statement of which this prospectus is a part becomes effective.
Additionally, Crescent had the right to assign its obligation to purchase shares
of our common stock to affiliates of Crescent; however, Crescent has informed us
that it has no current or future plans to assign its obligations.
Specifically, with regard to the sale of shares of our common stock to
Crescent, we can from time to time at our option and subject to the limitations
described in this prospectus, issue and sell shares of our common stock with an
aggregate purchase price of up to twice the average daily trading value during
the 22 trading day period immediately preceding the date of the notice by us
requiring Crescent to purchase, but no more than $1.5 million at one time. The
purchase price is determined by taking the lower of $1.1561 and 92% of the
average of the lowest three consecutive bid prices during the 22 trading day
period immediately preceding the applicable sale date.
Under the agreement we are required to register the shares issuable to Crescent
through the registration statement of which this prospectus is a part and
subsequent registration statements.
Warrants Issued to Crescent International
Incentive Warrant
In further consideration for Crescent entering into the Securities Purchase
Agreement, the Company issued an Incentive Warrant to Crescent exercisable to
purchase 700,000 shares of common stock at a price of $1.3064 per share. The
Incentive Warrant is exercisable for a five-year period commencing September 28,
2001, and provides for adjustment in the price and number of warrant shares:
16
. If the Company, at any time while the Incentive Warrant is unexpired
and not exercised in full, consummates a reclassification,
consolidation, merger or mandatory share exchange, sale, transfer or
lease of substantially all of the assets of the Company;
. If the Company, at any time while the Incentive Warrant is unexpired
and not exercised in full, shall subdivide its common stock, combine
its common stock, pay a dividend in its capital shares, or make any
other distribution of its capital shares; and
. If the Company, at any time while the Incentive Warrant is unexpired
and not exercised in full, makes a distribution of its assets or
evidences of indebtedness to the holders of its capital shares as a
dividend in liquidation or by way of return of capital or other than as
a dividend payable out of earnings or surplus legally available for
dividends under applicable law or any distribution to such holders made
in respect of the sale of all or substantially all of the Company's
assets, or any spin-off of any of the Company's lines of business,
divisions or subsidiaries.
Upon each adjustment of the exercise price, the number of shares of our common
stock issuable in connection with the Incentive Warrant at the option of
Crescent shall be calculated, to the nearest one hundredth of a whole share,
multiplying the number of shares of our common stock issuable prior to an
adjustment by a fraction:
. The numerator of which shall be the exercise price before any adjustment;
and
. The denominator of which shall be the exercise price after such
adjustment.
In addition, Crescent may not exercise its warrant if, at the time of exercise,
the number of shares that it would receive, together with all other shares of
the Company's common stock which it beneficially owns, would result in Crescent
owning more than 9.9% of the Company's common stock as would be outstanding on
the exercise date.
Protective Warrant
In further consideration for Crescent entering into the Securities Purchase
Agreement, if the Company elects to exercise its right with respect to any
subsequent sale to require Crescent to purchase shares of our common stock that
have not been previously registered and are not covered by an effective
registration statement, then on each closing date related to each subsequent
sale, the Company shall issue to Crescent a Protective Warrant with an exercise
price of $0.01 per share of common stock, for the purchase of such number of
shares which shall be determined by subtracting (x) the investment amount with
respect to the applicable subsequent sale divided by the purchase price on the
sale date from (y) the investment amount with respect to the applicable
subsequent sale divided by the purchase price on the effective date applicable
to the sale date.
Liquidated Damages
Pursuant to our registration rights agreement with Crescent, we are required to
pay Crescent liquidated damages if we fail to obtain the effectiveness of any
registration statement, including any future registration statement, required
under our registration rights agreement, or to maintain its effectiveness for
the period required under our registration rights agreement. If we fail to
obtain the effectiveness of any registration statement for which effectiveness
is required
under our registration rights agreement, we are required under the registration
rights agreement to pay to Crescent an amount equal to 2% of the aggregate
purchase price paid by Crescent for securities that are registered for resale,
or required to be registered for resale, by Crescent as described in this
prospectus, for each calendar month and for each portion of a calendar month,
pro rata, during the period from the effective date of the applicable
registration statement to the effective date of the applicable deficit shares
registration statement.
We will also be liable for liquidated damages similarly computed if we fail to
keep any required registration statement effective for a period of time ending
180 days after the termination of Crescent's obligation to purchase shares of
our common stock, plus one day for each day that we have failed to obtain or
maintain effectiveness of the registration statement.
Right of First Refusal
Crescent has been granted a right of first refusal for any or all shares in a
proposed sale by us of our securities in a private placement transaction exempt
from registration under the Securities Act of 1933, as amended, until 60 days
after
17
the date the Securities Purchase Agreement between Crescent and us is
terminated. Such right of first refusal shall be held open to Crescent for five
trading days from the date of the proposed offer to sell the securities.
10% Limitation With Respect to Crescent
Under the terms of our Securities Purchase Agreement with Crescent, the number
of shares to be purchased by Crescent or to be obtained upon exercise of
warrants or conversion of the Convertible Note held by Crescent cannot exceed
the number of shares that, when combined with all other shares of common stock
and securities then owned by Crescent, would result in Crescent owning more than
9.9% of our outstanding common stock at any given point of time.
The following table is for illustrative purposes only and sets forth the number
of shares of our common stock issuable to Crescent assuming Crescent were to
purchase the maximum amount of securities allowable under the Securities
Purchase Agreement at the prices stated below. Such number of shares is,
however, subject to the 9.9% limitation whereby Crescent may not own more than
9.9% of the Company's common stock as would be outstanding on any given date.
Purchase Number %
Price of Shares of shares (e)
---------- ----------- -------------
$0.600 (a) 16,666,666 20.4%
0.450 (b) 22,222,222 25.5%
0.300 (c) 33,333,333 33.9%
0.150 (d) 66,666,666 50.6%
(a) Represents bid price at close of business on June 11, 2002.
(b) Represents a 25% decrease from the bid price at close of business on
June 11, 2002.
(c) Represents a 50% decrease from the bid price at close of business on
June 11, 2002.
(d) Represents a 75% decrease from the bid price at close of business on
June 11, 2002.
(e) Securities purchase agreement limits Crescent's ownership to 9.9% of
outstanding shares.
18
MARKET PRICE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is tradedOur shares trade on the over-the-counter market in
the National Quotation Bureau's Pink Sheets electronic bulletin board.board
operated by the NASD. The following table shows the range of representative bid
prices for the
Common Stock.our shares. The prices represent quotations between dealers and do
not include retail mark-up, mark-down,markdown, or commission, and do not necessarily
represent actual transactions. The number of stockholders on record as of March 13, 1998,June
11, 2002 is approximately 3,000.19,000. Some of the stockholders on record are
brokerage firms that hold shares in the "street name". Therefore, the Company believeswe believe the
total number of stockholders may be greater than 3,000.19,000.
1995 1996 1997
--------------- --------------- -----------------
1999 2000 2001 2002
High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ----
First Quarter $1.812 $0.250 $1.625 $0.875 $1.625 $1.187$1.219 $0.453 $12.375 $0.266 $2.812 $1.062 $1.350 $0.580
Second Quarter 1.250 0.250 1.7190.938 0.391 6.219 2.750 1.990 1.125 1.219 0.7500.780 0.450
Third Quarter 1.067 0.625 1.625 1.125 1.172 0.8750.750 0.266 6.562 3.234 1.970 0.900 - -
Fourth Quarter 1.000 0.567 2.000 0.938 2.590 1.0630.703 0.219 4.312 0.781 1.550 0.660 - -
The closing bid price of a share of the Company's Common Stock on June 11, 2002 was $0.60. We have
never paid dividends and do not anticipate paying any dividends in the
foreseeable future. We currently intend to retain earnings, if any, for product
development, production and marketing, strategic acquisitions and for general
working capital requirements.
SELECTED FINANCIAL INFORMATION
(In thousands, except per share data)
The following table summarizes the consolidated financial data for our
business. You should read the following summary consolidated financial data
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and our Consolidated Financial Statements and
accompanying Notes beginning on page F-1 of this prospectus.
Three months
Year Ended December 31, ended March 13, 1998 was $1.281. The Company has never paid dividends on its Common
Stock and does not anticipate paying any dividends31,
-----------------------
(amounts in the foreseeable
future. The Company currently intends to retain its earnings, if any,
for acquisitions, product development, production and marketing, and for
general working capital requirements, including employee benefits.
SELECTED FINANCIAL DATA
(In thousands, except per share data)
The following financial information has been derived from the Company's
Financial Statements. The results of interim periods are not audited and
are not necessary indicative of operation for the full year. This
selected financial information should be read in conjunction with
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS," the Company's Financial Statements and Notes thereto,
and the other financial information appearing in this Prospectus.
Year Ended December 31
1993 1994 1995 1996amounts) (unaudited)
1997 1998 1999 2000 2001 2002 2001
---- ---- ---- ---- ---- ---- ----
INCOME STATEMENT DATA:
Revenues $ 23,5612,730 $ 9,6035,368 $ 1832,279 $ 94860 $ 2,7302,620 $ 152 $ 445
Cost of Sales 22,005 47,867 94 279 4,345 5,758 4,834 2,876 2,745 504 328
------- ------- ------- ------- -------- ------- ----- ---- -------
Gross Profit (Loss) 1,556 (38,264) 89 (185) (1,615) Loss before Extraordinary Item (3,398) (49,173) (795) (1,397) (3,988)
Extraordinary Items - - - 38,065 -(390) (2,555) (2,016) (125) (352) 117
Net Income (Loss) (3,398) (49,173) (795) 36,668 (3,988) (6,132) (9,306) (7,515) (13,252) (1,932) (1,015)
EARNINGS PER COMMON SHARE (1):
Loss Before Extraordinary Item (0.24) (3.41) (0.06) (0.06) (0.13)
Extraordinary Item - - - 1.58 -
-------- ------- ----- ---- -------SHARE:
Net Income (Loss) (0.24) (3.41) (0.06) 1.52 (0.13) (0.16) 0.20) (0.13) (0.21) (0.03) (0.02)
As of December 31, 1993 1994 1995 1996 1997As of March 31,
------------------ ---------------
(amounts in thousands) (unaudited)
BALANCE SHEET DATA: 1997 1998 1999 2000 2001 2002 2001
---- ---- ---- ---- ---- ---- ----
Total Assets 15,838 298 426 3,402 7,6297,269 6,719 3,372 11,161 3,917 3,917 3,917
Long Term Debt - - - 43 346430 303 185 102 1,197 1,197 1,197
Working Capital (Deficit) (2,123) (50,167) (49,968) 3,020 4,4274,511 260 (917) 3,015 680 680 680
Stockholders Equity (Deficit) (850) (50,028) (50,910) 3,093 5,676 2,885 552 10,521 2,049 2,049 2,049
(1) Income(Loss)Income (Loss) per common share is calculated based on the weighted average
number of Common Shares at December 31, 1993, 1994, 1995, 1996,
and 1997 were 14,137,100; 14,408,354; 14,408,354; 24,076,301; and
30,734,045, respectively.shares for the respective period.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS 1997 COMPARED TO 1996 AND 1995Results of Operations - Three months ended March 21, 2002 Compared to Three
months ended March 31, 2001
Revenues for the three months ended March 31, 2002 and 2001 were approximately
$152,000 and $445,000, respectively. Net sales increased from $5,000 in 2001 to
approximately $93,000 in 2002. Sales generated by the Company's interactive
cable system subsidiary, Suncoast, accounted for approximately $78,000 of these
revenues with the balance being parts and accessories for the Orasis(R) and
OraLynx(TM). Design service revenues in the first quarter of 2002 were
approximately $59,000 as compared to revenues of $441,000 in the first quarter
of 2001. This reduction in design service revenue is a continuation of the
decline in engineering projects available in the marketplace which the Company
began experiencing in the fourth quarter of 2001. Cost of sales represents costs
associated with the Suncoast operations for 2002, whereas cost of sales in 2001
related to the costs of parts and accessories. Cost of services increased from
$326,000 in 2001 to $448,000 in 2002. The Companyincrease is a result of the
termination of and its subsidiaryseverance benefits paid to the engineering staff which was
reduced during the first quarter of 2002. Because of these additional expenses,
gross profit margins were negatively affected and generated a gross loss of
$352,000 for the first quarter of 2002.
Selling, general and administrative expenses increased to approximately
$1,111,000 in 2002 from $476,000 in 2001. The increase of approximately $635,000
is primarily due to the selling, general and administrative expenses of Suncoast
and the Company's branch office in Piraeus, Greece which are primarily engagedincluded in electronic
product engineering, developmentthe
first quarter of 2002 and not in 2001. These amounted to approximately $319,000
and $238,000, respectively. We acquired the net assets of Suncoast in July 2001
and opened the branch office in August 2001. In addition, approximately $130,000
of additional administrative costs were incurred at the Company's McHenry,
Illinois location related to closing the facility. These costs were offset by a
reduction of $52,000 in sales and contract manufacturing
services. Allmarketing expenses, primarily advertising.
Research and Development expenses decreased to approximately $241,000 during the
first quarter ended March 31, 2002 from $463,000 for the corresponding period in
2001. The set-top box design was substantially completed in the fourth quarter
of these activities are highly competitive2001 which is reflected in the decrease in Research and sensitiveDevelopment expenses.
In 2002, approximately 66% of Research and Development costs consisted of costs
related to many factors outsidethe development of the controlset-top box, with 34% related to further
development of the Orasis(R). In 2001, the majority of Research and Development
was costs were for the set-top box.
Interest expense increased to approximately $233,000 for the first quarter of
2002 from $7,000 for the first quarter of 2001. Included in interest expense in
the first quarter of 2002 is three months amortization of the debt discount
associated with the Convertible Note, amounting to $231,000. The remaining
interest is related to capital equipment leases, mortgage note and other
borrowings. Interest expense in the first quarter of 2001 related to capital
equipment leases and short term borrowings. Interest income declined from
$89,000 in 2001 to $4,000 in 2002 due to the reduction of short-term funds held
on deposit.
Net loss
The consolidated loss after tax increased for the first quarter ended March 31,
2002 to approximately ($1,932,000) or ($0.03) per share from ($1,015,000) or
($0.02) per share in 2001. The loss for 2002 was primarily attributed to the
decrease in revenues from design services, the increase in cost of services
related to the termination of the hardware design engineering staff, the
increase in selling, general and administrative costs generated by Suncoast and
the branch office and the increase in interest expense. The loss for 2001 was
primarily attributed to the amortization of goodwill associated with the
acquisition of Advanced Digital Designs, Inc., research and development costs
regarding the set-top box and general administrative expenses. Loss per common
share is calculated based on the monthly weighted average number of common
shares outstanding, which were 64,510,424 for the three-month period ended March
31, 2002, and 61,798,069 for the three-month period ended March 31, 2001.
Balance Sheet
Total assets for the Company including general
economic conditions affecting Company's clientsat March 31, 2002 were approximately $3,123,000, a
decrease of approximately $800,000 from December 31, 2001. The decrease was
primarily attributable to the net cash used in operations of approximately
$976,000, the purchase of equipment of $315,000, offset by the proceeds from the
exercise of stock warrants and availabilitystock
20
options of components.
The total revenue$460,000 and the increase in borrowings of $350,000.
Results of Operations December 31, 2001 Compared to December 31, 2000
Revenue for the Company increased from $183,000approximately $860,000 in 19952000 to
$2,621,000 in 2001. Revenues from the sale of products increased from $64,000 in
2000 to $1,274,000 in 2001. The significant increase is the result of the
Company beginning shipment of its set-top box during the fourth quarter of 2001.
Additionally, the Company recognized approximately $135,000 of revenues from its
interactive cable provider subsidiary, Suncoast Automation Inc. ("Suncoast").
These revenues are only for six months, since the Company acquired the net
assets of Suncoast on July 1, 2001. Design service revenue increased from
$796,000 in 2000 to $1,346,000 in 2001, an increase of 69%. Design service
revenues in 2000 were for four and $94,000one-half months, since the date of
acquisition of Advanced Digital Designs, Inc. ("ADD") on August 18, 2000. Design
service revenues began declining during the second half of 2001, as customers
began canceling projects and not beginning new ones. Cost of sales decreased
from $2,376,000 in 19962000 to over $2,700,000$1,680,000 in 1997, increasing2001. Cost of sales almost 29
timesin 2000 included a
write down of obsolete inventory of $1,440,000 and a write down of inventory to
its net realizable value of $510,000. Cost of sales for 2001 includes the costs
of the set-top boxes sold, as well as a write down of obsolete inventory of
$490,000. Cost of services increased from 1996. This growth rate$500,000 in 2000 to $1,137,000 in
2001. Cost of services for 2000 are included only from the date of acquisition
of ADD, representing four and one-half months. Cost of services consist
primarily of payroll and related employee benefits of the engineers performing
the services. Gross profit for design services decreased from 37% in 2000 to 16%
in 2001. The decline in gross profit is a result of the decline in revenues
while cost of services remained at annualized levels did not decrease in
proportion to the revenues.
Selling, general and administrative expenses increased to approximately
$4,742,000 for 2001 as compared to $3,630,000 for 2000. Selling, general and
administrative expenses for 2000 consisted of professional fees and financial
service expenses related to the private placement, salaries for administrative
personnel, expenses for the common stock purchase agreement, administrative
costs associated with the design services subsidiary, ADD and costs associated
with exercising the drawdown. For the year 2001, these selling, general and
administrative costs were partially offset by primarily expenses associated with
the issuance of common stock for reimbursement pursuant to a personal guarantee,
salaries for administrative and marketing personnel, expenses in establishing
the operations of the Greek branch office and expenses pertaining to the
Suncoast subsidiary. Included in selling, general and administrative expenses
for 2001 are the operations of the branch office in Greece, amounting to
approximately $300,000. Also included in 2001 are six months of selling, general
and administrative expenses of Suncoast, included since the date of acquisition.
These approximated $490,000.
Research and Development costs increased to approximately $2,434,000 for 2001 as
compared to $1,472,000 for 2000. Approximately 84% of Research and Development
in 2001 consisted of costs associated with the development of the OraLynx(TM)
set-top box, with approximately 16% for the development of the new version of
the Orasis(R). Research and Development costs in 2000 were for the development
of the OraLynx(TM) set-top box.
Amortization of goodwill associated with the acquisition of ADD amounted to
$1,100,000, whereas in 2000, only four and one-half months of amortization are
included, which amounted to $412,500.
Asset impairment and other losses for 2001 consisted of the write off of the
remaining goodwill associated with the acquisition of ADD of $3,987,500 and
$290,000 of an investment in non-marketable securities. During the fourth
quarter of 2001 the Company determined that the set-top box design was completed
and the design services business with outside customers was declining, therefore
an impairment of the goodwill associated with the acquisition of ADD occurred.
The Company revised its projections and determined that the projected results
would not fully support the future amortization carrying value of the goodwill
balance. In addition, the Company determined that the carrying value of its
investment in non-marketable securities had been impaired since the investment
had discontinued paying dividends in 2001 and due to the overall poor financial
condition of the issuing company.
Interest expense increased to approximately $274,000 for the year ended December
31, 2001 from $68,000 for the year ended December 31, 2000. Included in interest
expense in 2001 is three months amortization of the debt discount associated
with the Convertible Note, amounting to $252,000. The remaining interest is
related to capital equipment leases and other borrowings. Interest expense in
2000 was a result of the capital equipment leases and other borrowings. Interest
on these leases and other borrowings decreased from $68,000 to $22,000 because
the outstanding balances on the capital leases and borrowings have decreased.
21
Results of Operations December 31, 2000 Compared to December 31, 1999
Revenue for the Company decreased from approximately $2,279,000 in 1999 to
$860,000 in 2000. The revenue decreased as a result of the Company's decision to
eliminate contract manufacturing and focusing its efforts on the development of
the set-top box. The Company determined that contract manufacturing was no
longer profitable and did not fit in to the overall business plan of the
Company. Contract manufacturing revenues approximated $2,000,000 in 1999.
Revenue for 2000 was also aided by the design services and consulting of the
Company's subsidiary, ADD. Gross revenue from ADD from the date of acquisition
of RMS.
Additionally, in 1995 and in the first half of 1996, the Company was
operating under Chapter 11 as a Debtor-in Possession and was in a
dormant state for all practical purposes.
The grossAugust 18, 2000, amount to approximately $985,000. Gross profit margins are
not comparable for the period due to the acquisition of RMS, inventoryfluctuations in revenue. The gross
profit margin for both years were effected by the write down of obsolete
inventory. For the year ended December 31, 2000 the write down of obsolete
inventory and the extreme fluctuations
in sales.
Inreserve for potential obsolete Orasis(R) inventory amounted to
$1,950,000 as compared to the fourth quarterwrite-off of 1997, in conjunction with the final stages of
development of OrasisTM and introduction of the product at the Fall 1997
COMDEX show, some of theobsolete inventory previously acquired for the
production of the DTR product line became obsolete. Originally, the
Company intended to use all parts of the DTR line in the design and
productionyear ended
December 31, 1999 of OrasisTM. The Company wrote down approximately $1.7
million of raw materials inventory comprised primarily of DTR line
batteries, power cords, digitizer panels and LCD screens. These items
have been redesigned or upgraded for OrasisTM. Also, the cost of DTR
product line was devalued to reflect the change in focus from DTR to
OrasisTM and the expected sales price of the DTR product.$1,793,000.
Selling, general and administrative expenses increased in 1997decreased to approximately
$1,500,000 from $1,007,000 in 1996 and $681,000 in 1995.$4,043,000 for 2000 as compared to $4,173,000 for 1999. The increase from 1996 to 1997 was attributablein
professional fees and financial service expenses related to the private
placement, common stock purchase agreement and cost associated with exercising
the drawdown, amounting to approximately $985,000, were offset by staff
reductions and other cost cutting measures implemented by management
approximating $1,115,000. The Company decided to eliminate contract
manufacturing in the third-quarter. The employee count at RMS was reduced from
185 employees during the beginning of 1999 to six employees at December 31,
2000. In addition, of RMS,
which accounted for over $300,000 ofcertain related expenses were also reduced, such expenses, an increase in trade
showas health
insurance, telephone, travel and advertising expenses, annual franchise taxesentertainment, utilities, office supplies and
interest
expense. The increase from 1995 to 1996 was attributable to the addition
of personnelother administrative expenses.
Research and professional services relating to reorganization
proceedings.
The net operating loss, before extraordinary item,Development costs increased to approximately $4,000,000$1,472,000 for 2000 as
compared to $510,000 for 1999. Research and Development in 1997 from $1,400,000 in 1996 and $795,000
in 1995. The increase in net loss was due to $1,800,000 write down2000 consisted of
inventory, increased research andcosts associated with the development activity, and the
introduction of the new OrasisTM product lateOraLynx(TM) set-top box, whereas in
the fourth quarter of
1997. In total the Company spent in excess of $825,0001999, these costs were for the research,continued development and introduction of OrasisTM in 1997 in comparison
to $77,000 spent in 1996 and $22,000 spent in 1995.
In 1996, due to debt forgiveness related to corporate restructuring and
closing of the bankruptcy proceedings,Orasis(R).
Interest expense decreased to approximately $68,000 for the Company recognizedyear ended December
31, 2000 from $2,099,000 for the year ended December 31, 1999. Interest expense
in 1999 was mainly a one-time
extraordinary income of over $38,000,000.
LIQUIDITY AND CAPITAL RESOURCES
Almost halfresult of the corporate assets are in liquid securities or cash duefinancing activities associated with the
conversion of debt to the conclusion of a private placement that raised approximately
$4,400,000 in the fourth quarter of 1997. After paying broker/dealer
fees and placement costs, the Company retained approximately $4,000,000
for operations. Approximately $280,000 of proceeds of the private
placement were used for settlement of short-term notes and approximately
$800,000 for ongoing research and development needs.
With the acquisition of RMS in June, 1997, the Company received
accounts receivable that have averaged approximately $400,000 during the
six month period ending December 31, 1997. With additional growth in
sales and profitability of RMS, management expects accounts receivable
to grow and provide a stable capital resource. During 1997, RMS
negotiated a capital lease to purchase certain surface mount equipment
for a total of $155,000, as well as, a $150,000 unsecured loan from the
McHenry Economic Development Board for expansion of the facilities and
creation of jobs.
Total working capital for the Company increased from just over
$3,000,000 in 1996 to approximately $4,800,000 in 1997, or an increase
of more than 50% previously due to various privatecommon stock transactions in
1997. Also, almost two-thirds of the working capital total for 1997 is
in liquid securities or cash versus only 20% in 1996.
The cash raised in the private placement should provide the operating
cash need for the current year as well as the starting capitalissuance of warrants
associated with the debt.
Liquidity and Capital Resources
The Company has incurred a net operating loss in each year since its founding
and as of March 31, 2002 has an accumulated deficit of approximately
$61,526,000. The Company expects to incur operating losses over the near term.
The Company's ability to achieve profitability will depend on many factors
including the Company's ability to manufacture and market commercially
acceptable products including its set-top box. There can be no assurance that
the Company will ever achieve a profitable level of operations or if
profitability is achieved, that it can be sustained.
For the three months ended March 31, 2002, the Company used $976,000 of cash in
operating activities, used $315,000 in investing activities and generated
$802,000 of cash from financing activities that produced a decrease in cash of
$489,000 for pre-
productionthe three months. The net loss of $1,932,000 was partially offset
by the non-cash items of depreciation and initial inventory build-up.amortization and amortization of the
debt discount associated with the Convertible Note. Investing activities
consisted of the purchase of equipment for installations associated with the
interactive cable systems. Financing activities consisted of the exercise of
warrants and the increase in mortgage note payable and short-term borrowings. As
of March 31, 2002, the Company had current liabilities in excess of current
assets, whereas at December 31, 2001, the Company had a current asset to current
liabilities ratio of 2.0. The introductionCondensed Consolidated Statements of OrasisTMCash Flows,
included in this report, detail the other sources and uses of cash and cash
equivalents.
In the second quarter of 2000, the Company entered into a common stock purchase
agreement, escrow agreement and registration rights agreement with Techrich
International Ltd., ("Techrich"). These agreements provided a $100,000,000
equity line of credit for use by the Company at its discretion. During the third
and fourth quarters of 2000, the Company received $7,000,000 from the equity
line in exchange for the issuance of 2,136,616 of common stock. In the third
quarter of 2001, the Company received an additional $300,000 from the equity
line in exchange for 258,968 shares of common stock. The shares underlying the
equity line of credit with Techrich were registered with the Securities and
Exchange Commission with an S-1 filing, File No. 333-35808, dated July 20, 2000
and effective on July 28, 2000.
22
On September 28, 2001 the Company entered into a $10 million Securities Purchase
Agreement with Crescent International Ltd., ("Crescent") an institutional
investor. Under the Securities Purchase Agreement, the Company issued a
Convertible Note for $2.5 million. Although the Company had the option to issue
further convertible notes to Crescent subject to certain conditions precedent,
such option expired on February 1, 2002 and no additional notes were issued. In
addition, the Company issued warrants exercisable to purchase 700,000 shares of
common stock at a price of $1.3064 per share for a five-year term. The Stock
Purchase Agreement further permits the Company to sell to Crescent up to $7.5
million in common stock of the Company over a 24-month period. Additionally, the
Company agreed not to exercise any drawdowns against its then existing common
stock purchase agreement with Techrich International Ltd., which expired on
January 28, 2002.
The Securities Purchase Agreement permits the Company to sell to Crescent and
requires Crescent to purchase from the Company, at the Company's sole
discretion, common stock of the Company for up to $7.5 million over a 24-month
period. Individual sales are limited to $1.5 million, or a higher amount if
agreed to by the Company and Crescent, and each sale is subject to our
satisfaction of the following conditions precedent (none of which are within the
control of Crescent): (1) the Company's representations and warranties must be
true and complete, (2) the Company must have one or more currently effective
registration statements covering the resale by Crescent of all shares issued in
prior sales to Crescent and issuable upon the conversion of the Convertible
Note, (3) there must be no dispute as to the adequacy of disclosures made in any
such registration statement, (4) such registration statements must not be
subject to any stop order, suspension or withdrawal, (5) the Company must have
performed its covenants and obligations under the Securities Purchase Agreement,
(6) no statute, rule, regulation, executive order, decree, ruling or injunction
may have been enacted, entered, promulgated or adopted by any court of
governmental authority that would prohibit the Company's performance under the
Securities Purchase Agreement, (7) the company's common stock must not have been
delisted from its principal trading market and there must be no trading
suspension of its common stock in effect, and (8) the issuance of the designated
number of shares of common stock with respect to the applicable sale must not
violate the shareholder approval requirements of the Company's principal trading
market. The aggregate amount of all sale shares and convertible notes issued
cannot exceed $10 million. The amount of the sale is limited to twice the
average of the bid price multiplied by the trading volume during the 22 trading
day period immediately preceding the date of sale. When the total amount of
securities issued to Crescent equals or exceeds $5 million, the Company shall
issue to Crescent a subsequent incentive warrant exercisable to purchase 400,000
shares of common stock at a price equal to the bid price on the date the
incentive warrant is issued. If the Company, for the purposes of obtaining any
additional financing, wishes to sell shares to a party other than Crescent, the
Company shall first offer to Crescent the right to purchase such shares at the
bona fide price offered by the other party.
The Company elected to pursue the above financing arrangements with Crescent
because the Company's previous financing arrangements with Techrich contained
certain limitations as it related to the market price of our common stock, the
average volume of shares traded on a daily basis and other such factors which
would not generate the greatest benefit to the Company's shareholders. In
addition, the financing arrangement with Techrich expired at the end of January
2002. Because of the changes in circumstances and the current economic
conditions of the Company, management decided to explore alternative financing
arrangements. Several alternatives were reviewed, including private placement
transactions, various long-term debt arrangements with different investment
bankers and other equity line arrangements similar to the one with Techrich.
Management felt that the arrangement with Crescent was the best alternative and
was in the best interest of the Company and its anticipated sales should provide a sourceshareholders.
The Company expects to rely on the above financing arrangements in order to
continue its development of capital needed for
further growthproducts and to continue its ongoing operations in
the short-term. The long-term cash needs of the Company operations. Management is reviewing its
current banking relationship to include a credit facility forwill be dependent on the
future.
INFLATION AND SEASONALITY
Due to the naturesuccessful development of the Company's products and their success in the market
place. At the current market trends,
increase in volume of production should generally result in a reduction
of cost per unit produced. Management does not anticipate any major
shifts in this trend in a foreseeable future. Also, due to the fact
thatrate, the Company targets industrial customeris not able to internally generate
sufficient funds for operations and notwill be required to rely on outside sources
for continued funding until such time as the Company's operations generate a
retail outlet,
the Company should not be effected by the seasonal nature of consumer
purchasing.
ACCOUNTING MATTERSprofit and cash is generated from operations. The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" (effective for financial statementshistorically
issued for
periods ending after December 15, 1997). SFAS No. 128 replaces primary
earnings per share with basic earnings per share, which excludes
dilution, and requires presentation of both basic and diluted earnings
per share on the face of the income statement. SFAS No. 128 requires
restatement of all prior earnings per share data presented. The
adoption is not expected to have a material impact on the Company's
earnings per share computations.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-based Compensation" (effective for fiscal years beginning after
December 15, 1995) encourages, but does not require, employers to adopt
a fair value method of accounting for employee stock-based compensation,
and requires increased stock-basedmay continue, if the fair value method is not
adopted. The Company does not have any stock-based compensation
arrangements covered by this Statement. Future implementation will have
an immaterial effect on the Company's operating results or financial
condition.
OTHER
Based on a preliminary study, the Company expectscircumstances warrant, to spend approximately
$75,000issue common stock to
$100,000 from March, 1998 through 1999 to modify its computer
information systems enabling proper processingvendors and suppliers in lieu of transactions relatingcash for products and services provided to the
year 2000Company.
BUSINESS
Overview
Dauphin Technology, Inc. ("Dauphin" or the "Company") and beyond. The Company continues to evaluate
appropriate courses of corrective action, including replacement of
certain systems whose associated costs would be recorded as assets and
amortized. Accordingly, the Company does not expect the amounts
required to be expensed over the next two years to have a material
effect on its financial position or results of operations.
BUSINESS
GENERAL The Company was founded tosubsidiaries
design manufacture and market mobile computing systems, including lap-top, notebook, hand-held, and pen-based computers components and accessories. Followingset-top boxes. The
Company is also a provider of private, interactive cable systems to the extended
23
stay hospitality industry. One of the Company's voluntary filingsubsidiaries has performed
design services, specializing in hardware and software development, to customers
in the communications, computer, video and automotive industries.
The Company, an Illinois corporation, was formed on June 6, 1988 and became a
public entity in 1991. As of December 31, 2001, the Company employed
approximately 50 people consisting of engineering, sales and marketing,
administrative, and other personnel. Because of the reduction in orders for
design services and the decision to terminate its operations at the facilities
in McHenry, during the first quarter of 2002, the Company laid off 24 full-time
employees and currently has 26 full-time employees. The Company's executive
offices are at 800 E. Northwest Highway, Palatine, Illinois and it has two other
facilities in northern Illinois, one in central Florida and a branch office in
Piraeus, Greece.
The Company's stock is traded on the over-the-counter market electronic bulletin
board operated by NASD, under the symbol DNTK.
In 1993 and 1994 the Company encountered severe financial problems. On January
3, 1995, ofthe Company filed a petition for relief under Chapter 11 of the Federal
Bankruptcy Code through its discharge and
closingin the United States Court for the Northern District of
bankruptcy proceedings onIllinois, Eastern Division. The Company operated under Chapter 11 until July 23,
1996, when it was discharged as Debtor-in-Possession and bankruptcy proceedings
were closed.
Strategic Plan
Before the Company operations
were in a dormant stage, for all practical purposes.
During reorganization,emerged from bankruptcy, the Board of Directors was
reconstituted and a new management team was recruited. Individuals with strong
engineering and manufacturing backgrounds as well as finance, accounting, sales
and marketing skills were hired. The new Company management formulated a strategic
business plan to diversify Companythe Company's operations to eliminate dependence on a
single product line or industry.
The plan incorporates
aincorporated an initial focus on the hand-held mobile computer products,market.
In particular, it focused on development of miniaturized mobile computers that
would be incorporated in electronic solutions for vertical markets. In addition
to mobile computing markets, management is focused on producing and marketing
other electronic devices, namely set top boxes, coupled with targeted
acquisitions in the technology sector, to create a holding company with
synergistic, self-managed wholly-owned subsidiaries. The subsidiaries
are intended to share resources and cross-market products and
engineering, contract manufacturing and product development services.
STRATEGIC PLAN Management believes that past operational and
financial difficulties resulted from the Company's single product
dependency and production practices that created substantial parts,
inventory and assembly cost liabilities that caused the Company to
invoke bankruptcy protection when customer orders were delayed.
Management further believes that the future operational and financial
stability of the Company may be realized only by minimizing risks
through product diversification and tight control over production
practices and costs. Diversification is expected to take place on the
basis of related product technologies, strategic partnerships and
acquisitions. Engagements will be selected with the purpose of
expanding the Company's customer base and to diversify its product and
service offerings and sales and marketing capabilities.
Management believes that the mobile computer electronics and contract
manufacturing industries are fragmented, with many participants
offering a variety of products and services that complement each other
or that involve or utilize overlapping production and operating
functions and resources. The Company intends to develop or acquire
products, services or companies that complement each other or offer
production and operating economies. The Company expects to grow through
acquisitions that management may from time to time consider appropriate
and complementary to Company operations. The Company expects to finance
acquisitions by using its shares of Common Stock for all orsector.
As part of the
consideration to be paid. If such shares do not provide or maintain
sufficient market value, or if potential acquisition candidates are
unwilling to accept such shares, the Company expects to use its cash
resources, if available, or additional debt or equity financings to
complete desirable acquisitions. The Company expects to conduct its
operations, and operations of any subsequently acquired businesses, on a
decentralized basis, with local management retaining responsibility for
day-to-day operations, profitability and growth.
The timing, size and success of Company acquisition efforts and
associated capital commitments cannot readily be predicted and there can
be no assurance that the Company will at any given time possess or have
access to resources sufficient to finance an acquisition considered
attractive to management. Moreover, management recognizes the need to
carefully oversee and institute controls to ensure decentralized
operations do not result in inconsistent operating and financial
practices. With these caveats in mind, the Company reintroduced the DTR
and in the process devised the new OrasisTM hand-held computer, which
management expects to supercede the DTR. The Company also acquired,management's plan, on June 6, 1997 the Company acquired all of the
outstanding shares of stock in RMS,R.M. Schultz & Associates, Inc. ("RMS"), an
electronics
contract manufacturingelectronic contract-manufacturing firm located in McHenry, Illinois. On September
8, 1997,In 1999,
the Company executedterminated the operations of RMS because the entity was not
profitable and used, rather than provided, cash in its operations.
On August 28, 2000 the Company, through a letternewly formed subsidiary named ADD
Acquisition Corp., acquired all of understandingthe assets of T & B Design, Inc. (f/k/a
Advanced Digital Designs, Inc.), Advanced Technologies, Inc., and 937 Plum Grove
Road Partnership pursuant to acquire
CADserv, an electronicsAsset Purchase Agreement. The subsidiary then
changed its name to Advanced Digital Designs, Inc. ("ADD"). ADD specializes in
design services firmin the telecommunications industry, especially wireless and
cable-based product development, as well as multimedia development, including
digital video decoding and processing.
To assist the Company in the further development and marketing of its set-top
box products, on July 1, 2001 the Company acquired substantially all of the net
assets of Suncoast Automation, Inc. ("Suncoast"). Suncoast is a provider of
private, interactive cable systems to the extended stay hospitality industry
utilizing the Company's set-top boxes.
In August 2001, the Company signed a sales and marketing agreement with the
Hellenic Telecommunications Organization S.A. (OTE) to sell set-top boxes
through their more than 400 retail shops, as well as to participate in several
vertical projects, meaning with other businesses or governmental agencies, that
OTE is managing. This relationship marks the Company's entry into the consumer
marketplace with its products. As a result of the agreement with OTE and other
similar marketing agreements reached with Orbit Plan and the Dialogue Group of
Companies, we established a European branch office consisting of twelve sales,
marketing, customer service and technical support personnel located in Schaumburg,
Illinois.Piraeus,
Greece.
The acquisition is conditioned upon Company Boardplans to market and distribute for consumer use, complementary
peripheral devices manufactured by other vendors in conjunction with its set-top
boxes. A portfolio of Directors' approvalcomplimentary peripheral devices would include video
telephones, displays, home cinema equipment, wireless local area network (LAN)
devices and procurement of necessary financing.various conferencing accessories. Specific consumer markets include
retail chains, Internet Service Providers (ISP), and satellite
24
programming providers.
As a result of the date hereof,agreements noted above, the proposed acquisitionCompany has not been presentedbecome involved in
vertical projects to develop communications solutions for law enforcement,
defense, surveillance and Olympic security utilizing Terrestrial Trunked Radio
(TETRA) technology. As a part of this solution, the Board, no valuation or priceCompany has been determinedbegun
development of a next generation Orasis(R) by exploring alternative mobile
hand-held computer products through original equipment manufacturers.
Products and no definitive
agreements have been entered.
DTR PRODUCTSServices
Orasis(R) is a hand-held computer developed by the Company with features to meet
the expressed desires of many potential customers. The Company historically enjoyed a leadership
positionunit was developed with
the multi-sector mobile user in mind. As such, it incorporated an upgradable
processor, user upgradable memory and hard disc, various modules and mobile
devices to satisfy the burgeoning marketneeds of mobile computing based upon its DTR
product line, which was marketed primarily to "niche" or "vertical-
market" users in the defense, medical and insurancevarious industries. The Company reintroducedhas not
recognized significant sales of the DTRproduct to date due to the lack of adequate
marketing and the development of new technologies within the industry. Because
of these new technologies, in 2001 the Company began developing a new version of
the Orasis(R). The new Orasis(R) will have most of the same features as the
original design, but will incorporate new technologies. The scheduled release of
the next generation Orasis(R) is currently planned for 2002-2003.
A set-top box is an effortelectronic device that converts digital signals into a user
acceptable format via other electronic devices such as television sets,
telephones and computers. The OraLynx set-top box processes high-speed video,
provides storage and works with coaxial cable, ADSL and fiber. The OraLynx(TM)
set-top box offers considerable advantages for service providers and end users.
For service providers, the OraLynx(TM) set-top box enables integration of data,
voice, and video over one unified network using one termination device. For end
users, the OraLynx(TM) set-top box serves as a simple yet sophisticated gateway
and access device that can be controlled with a remote control, keyboard or
other mobile handheld device. The OraLynx(TM) set-top box can be networked to
regain that leadership
position following reorganization.PC's, Internet appliances, and more. The OraLynx(TM) can provide direct access
to interactive TV, video-on-demand and ATM or IP voiceover phone service. Basic
unit features are as follows:
. High quality/high speed user interface (2D graphics)
. Seamless Video-on-Demand Service
. Instant Telephone Access
. IP or ATM voiceover
. Supports standard Internet protocols and various Internet connections
(xDSL, SONET, ATM25, Ethernet)
. Networking and Smart Appliance Interface o Provides wireless or
conventional networking
The Company reintroducedalso designs, constructs, installs and maintains private interactive
entertainment systems, focusing primarily in the DTRextended stay hospitality
industry, utilizing the Company's set-top boxes. The Company provides all
service and maintenance on the entire system. In addition to incorporatebasic cable TV, the
Company's system offers high speed internet connectivity, tiered programming,
pay-per-view, games, room messaging, folio view, express check-out and community
channels.
During 2001 and 2000, the Company performed design changesservices, specializing in
hardware and features to address current market
conditions, includingsoftware development. In addition, the adventCompany's engineers
consulted with and assisted customers in the development of PCMCIA options, sound capabilities,
pen recognition improvements, mobileintellectual
property. The Company's engineers specialize in telecommunications, especially
wireless communications, and the
recent explosion of the Internet,cable-based product development, as well as the proliferationmultimedia development,
including digital video decoding and processing. The design services part of the
lap-top computers, which started a new wavebusiness has decreased significantly, and in the first quarter of interest in palm-top
computers. In so doing,2002, the
Company devisedlaid off the majority of its new OrasisTM hand-held
computer line which management expects to supercede the DTR.
Consequently,design engineering staff. As existing
contracts with customers expire and are completed, the Company at this time doeswill not expect to actively
market or producepursue
additional orders.
Markets
Based on the DTR product line.
ORASISTM PRODUCTS Based upon customer feedback received duringlatest statistics, the reintroduction of the DTR, management decided to create a new computer
that could provide greater performance, functionality, expandability
and battery life capacity. Customer feedback indicated to management
that many past misconceptions regarding mobile computer capabilities had
been reduced including, but not limited to, previous customer confusion
of the DTR product with less capable, versions of palm-top computing devices referred to as Personal Digital Assistants or PDA's, such as
APPLE's Newton notepad. Unlikemarket is
approximately $110 billion in annual revenue. Sales of laptop and notebook
computers represent a large portion of this market. However, the DTR, PDAs were designed to be
electronic data communicators capable onlygrowth rate of
pen sketch capturehand-held pen-based devices exceeds that of laptops and communications to the host PC or among themselves, but did not have the
capabilities of the DTR miniature computers. In designing its new hand-
held computer, the Company addressed the advent of PCMCIA options, sound
capabilities, pen recognition improvements, mobile wireless
communication, and the recent explosion of the Internet, as well as the
proliferation of the lap-top computers, which started a new wave of
public interest in palm-top computers.
In July 1997, the Company contracted with several firms specializing in
electronics engineering, packaging, mechanical and industrial design to
develop the OrasisTM hand-held computer. To date, the Company has
invested over $1,400,000 in developing OrasisTM and has retained all
intellectual property rights to the OrasisTM product.
The OrasisTM computer, which was introduced to the public at COMDEX in
November 1997, is the Company's new, market driven hand-held computer
developednotebooks. Based on the
basis of specific customer featurelatest Frost and design
suggestions received during DTR reintroduction.Sullivan studies, the total pen-tablets market, in which
Orasis(R) competes, is several billion dollars and is growing at approximately
twenty five
25
percent per year.
The basic unit weighs
less than three pounds and has a battery life of from two to eight hours
or more. Equipped with 133 MHz Pentium MMX processor, up-gradable to 233
MHz Pentium MMX, it is faster any hand-held computer presently
available. In addition, the basic unit includes infra-red keyboard,
electro-magnetic pen, standard two type II or a single type III PCMCIA
slot, 1.6 GB expandable to 2.1 GB hard drive, five screen options, built
in speaker and microphone (including sound blaster for voice recognition
and multi-media) and many other options.
The main advantage of OrasisTM is represented by its up-gradable
features such as its processor, screens and modular expansion bay. The
expansion bay allows for the use of CD/ROM, floppy drive, and wireless
radio, extended battery pack or any other device through the PCI
expansion bus. Unlike other products, OrasisTM does not lock the user
into a single format or a costly catch-all unit. OrasisTM provides
complete flexibility and versatility unlike any other computer presently
on the market. Itset-top box market is a time, labor, and money-saving device that was
designed to free users from their desks. Much more flexible and
powerful than a PDA, the OrasisTM is an MS-DOS/Windows/Windows95/Windows
NT-compatible machine.
At the present time, OrasisTM is in the pre-production stage of
development. Several prototypes have been demonstrated to potential
customers since its introduction in November 1997. Due to the fact that
lead times for some of the components range form six to twelve weeks,
management presently plans to build additional pre-production models for
marketing purposes only.
Markets Unlike several years ago, the hand-held computer market is
more defined and is ready for a product such as OrasisTM. OrasisTM is a
significant technological and marketing step forward among mobile
computing devices. New developments in battery technology allow the
device to be portable and useful to customers who need computing
capacity at remote locations. Moreover, the advent of PCMCIA options,
sound capabilities, pen recognition improvements, mobile wireless
communications, and explosion of the Internet started arelatively new wave of
interest in hand-held computers.phenomenon. According to the latest estimates
publishedresearch
firm, Strategy Analytics, the worldwide installed base of set-top boxes was a
mere 2.2 million in industry magazines, the total market for mobile hand-held
computing devices exceeds $2.5 billion. This market does not include
notebook or laptop computers. Mobile hand-held pen computers represent
about $5001998 and was 27.4 million of the total mobile computing devices market. The
remainder of the market consists of PDA's, that are communication
devices only. Management believes that the actual market for the mobile
computers is much larger than the latest estimates. Management also
believes that available mobile hand-held devices do not offer as much of
a challenge to notebook computers. The introduction of OrasisTM may
expand the customer base to companies that are currently using notebooks
in their business. The power, modularity and upgradability of OrasisTM
can be equated to the most sophisticated notebook computers today.
Added features and flexibility of the unit may also attract public
attention, thereby growing the overall category. The Company believes
that today's mobile computer and wireless communication market provides
an opportunity to further develop the mobile line of products.
Production schedules and further product developments will be
correlated with market requirements and sales performance. Accordingly,
adjustments in product configurations will be made to satisfy the price
and functionality requirements of the targeted OEM markets.
Competition The Company is currently marketing its OrasisTM product.
This product competesboxes in the mobile pen- based computer market.
Worldwide there are less than thirty companies competing in this market.
However, notebook computer manufacturers could be considered competitors
to OrasisTM. Some of these competitors are large, well financed
entities, such as Fujitsu or IBM. In order for the Company to have a
competitive edge, it must have leading technology, market-driven
products or cost effective products. When new products are introduced,
there is a small window of opportunity before clones are developed.
However, being a small company, the Company's strength will be in its
flexibility to meet industry demandsyear 2000, and to partner with solution
providers to jointly offer unique solutions for specific problems that
customers encounter.
Sales and Marketing OrasisTM is a "niche" product. The Company's
plan is to sell OrasisTM through software integrators and value-added
resellers to industrial buyers. Presently, the Company has
successfully recruited several sales channel managers, whose sole
responsibility is to manage distribution chains within targeted markets.
The Company has targeted four main vertical markets: medical automation;
sales and field force automation; utilities; and financial automation.
Other markets such as government or inventory and plant maintenance may
be targeted later.
Patents, Copyrights and Trademarks OrasisTM is the result of
engineering design by the Company and its strategic partners. The
Company will attempt to maintain its proprietary rights by trade secret
protection and by the use of non-disclosure agreements. It is possible
that OrasisTM could be duplicated by competitors and the Company could
therefore be adversely affected by duplication and sales. However, in
view of the rapid technological and design changes incident to the
computer industry, the Company does not believe that, in general, patent
and/or copyright protection would be an effective means to protect its
interest. The Company has, however, filed a trademark/tradename
registration for the OrasisTM mark and name.
THE RMS ACQUISITION AND PRODUCTS As part of its strategic plan, the
Company acquired on June 6, 1997, through a stock-for-stock exchange, of
all outstanding shares of stock in R. M. Schultz & Associates, Inc., an
Illinois corporation ("RMS"). RMS is engaged in contract engineering
and manufacturing services. It operates from a 53,000 square foot
facility located in McHenry, Illinois with approximately sixty
employees, including seven electronic engineers, ten administrative
staff and operational management, and the remainder represented by
production personnel.
RMS began as a one-man consulting and design firm in 1979. Since then
it grew in personnel, customer base, revenue and facility space. For
the past fifteen years, RMS has been involved in the design and
manufacturing of products ranging from baby toys to communication
devices. Some of the more visible products that RMS has produced
include scoreboards at the Soldier Field and The United Center in
Chicago, ThreeCom Park in San Francisco and Dallas Stadium, which were
completed for a large Chicago sign company. RMS has also designed and
built the credit card validation system for a large debit card provider,
water softener control system equipment for a bottled water company and
process data acquisition system for a large chemical company.
Services The capabilities of the engineering staff at RMS encompass a
wide range of microprocessor, analog, digital, and control disciplines.
Each RMS engineer has a specific product, which he/she is responsible
for. By having a key person on the engineering staff assigned to each
production project, an effective liaison is created. Engineers are
responsible for helping to develop the product, as well as, the
production process, work stations, tools, and fixtures. RMS also
provides consulting services on many product development and improvement
projects.
With the aid of automatic assembly equipment, RMS is able to assemble
large quantities of various electronic products. The majority of the
work performed by RMS since its inception has been in through-hole or
large component electronic assembly. Even though this represents an
older production method, it still represents the majority of electronic
products assembly. Since the RMS acquisition, more than $400,000 was
spent to build a Class B+ clean room (environmentally controlled room)
inside the RMS facility, and to acquire surface mount equipment. Such
equipment allows for high-speed/high-tech component placement on a PCB,
a newer method of product assembly. In the past, RMS had to employ
other firms to incorporate surface mount portions in the final product.
In combination with the through-hole process, surface mount technology
allows RMS to target over 90% of electronic products manufactured today.
Markets The contract manufacturing market grew substantially in the
early-1990's, when large companies began to shed captive manufacturing
plants and engineering staffs. That trend became evident in the
electronic manufacturing industry. Technological advancements were too
frequent and too dramatic for an individual company to absorb. Instead,
many companies saw the opportunity to cut the cost of capital
expenditures and labor by out-sourcing work to specialty shops like RMS.
In the latest Frost & Sullivan studies, released in 1997, the electronic
contract manufacturing industry is
expected to grow from $22,000,000,000by 35% in 19972002. Currently with the market in the early
developing stages, the "set-top box" has not been perfected. Existing designs do
not offer the flexibility or future capacity that Dauphin's customers seek.
Our focus on the timeshare market is based upon current statistics indicating
annual timeshare global sales topping $6 billion and timeshare growth between
16% and 18% a year for the past seven years. Timesharing is the fastest-growing
segment of the global travel and tourism industry. According to an estimated $110,000,000,000the January 1999
issue of Bear, Stearns & Co. Inc.'s Leisure Almanac, "the confluence of rapidly
growing population of income-qualified households and increased utilization
should result in 2004. Management believes
thatcollective revenues of $200 billion between 1995 and 2009." In
1998, the growth rate, estimated at 26% per year, will actually exceed
that projection.United States accounted for $3.06 billion--approximately half--of the
world's timeshare sales revenue, according to a survey sponsored by the American
Resort Development Association. In 2000, U.S. sales were about $4.1 billion,
according to Ragatz Associates. The United States also leads in the number of
resorts (more than 1,600) and owners (nearly 3 million). According to Ragatz
Associates, in 1998 there were 4.25 million timeshare owners living in more than
200 countries and over 5,000 timeshare resorts in more than 90 countries.
Sales and Marketing
In October, 1997, RMS retainedDuring the later part of 1999, the Company was engaged in negotiations and
eventually on February 17, 2000 signed a contract with Estel Telecommunications
S.A. ("Estel"), a European telecommunications firm seeking to develop an
ultra-high speed information technology network, to develop and produce set-top
boxes. Estel intended to construct, install and operate a fiber optic cable
network system offering telephone, television, Internet and other services of
an industrial marketing firm, which performed a studyin
Greece. On August 30, 2000 and December 28, 2000 the contract was amended to
extend the delivery dates, amend certain specifications of the local
electronicproduct and amend
certain terms and conditions pertaining to Estel's performance. During 2000 and
into the first six months of 2001, the Company focused its primary marketing
resources around the Estel contract manufacturing market. The study identifiedand did not actively market its products to
other companies. This was because the Midwestern states that representCompany had very limited staffing
resources and the lack of aggressive marketing was not a high percentagedirect result of the
terms of the contract with Estel. The set-top box agreement with Estel was
terminated on July 1, 2001 due to the lack of performance by Estel and the
inability of Estel to meet the terms and conditions of the agreement.
During the year 2001, the Company focused its marketing efforts in Greece, as it
established a strong relationship with the Hellenic Telecommunications
Organization S.A. (OTE). The Company has a sales and marketing agreement with
OTE, whereby the Company's products are marketed through the OTE Commercial
Network throughout Europe and the Middle East. OTE is a multi-billion dollar
company comprised of well known subsidiaries including CosmOte, OTEnet, OTESAT,
CosmoOne, OTEGlobe, OTEestate, HELLASCOM and other affiliated companies based in
Bulgaria, Yugoslavia, Romania, Armenia, Albania and Jordan. OTE is a public
company and trades on the Athens Exchange and the New York Stock Exchange. OTE
is a reseller of our products in Greece and other European countries. OTE will
work directly with our Greek based branch marketing and sales office. The branch
office was opened in August 2001. The office is staffed with approximately
twelve sales and marketing personnel. In addition, the Company has developed a
relationship marketing arrangement with Orbit Plan S.A., a strategic planning
and business development firm having a presence in more than ten countries, for
assistance in marketing the Company's products into many regions of Europe,
Russia, the Commonwealth of Independent States, China and the Far East. The
Company has also entered into a marketing arrangement with the Dialogue Group of
Companies which establishes the framework for joint development of a
communications infrastructure for law enforcement and local public safety
authorities, as well as development of certain related software applications.
The agreement calls for bilateral representation of each respective company's
products. The Dialogue Group of Companies is a Russian/American joint venture
and is among the largest private commercial enterprises in the former Soviet
Union, employing more than 3,500 people with clients that include the Ministry
of Internal Affairs in Russia, the Moscow Police Department and the Federal Tax
Police.
The Company's interactive cable systems are marketed primarily to the extended
stay hospitality industry through advertising and direct contact with the
customer.
Competition
Many competitors exist in the market segments where Dauphin competes. In the
hand held computer market, companies such as Epson, Fujitsu, IBM, and Mitsubishi
are market segment leaders. The companies manufacturing expenditures madeset-top boxes
26
are equally as impressive, including Motorola and Scientific Atlanta. However,
Dauphin management believes some advantages exist over the last several years. In
January, 1998, RMS hired a sales manager who, in conjunction with RMS'
existing sales force, will concentrate efforts on direct sales contact
with firms in needcompetition including
flexibility, adaptability and unique solutions driven designs. Most of electronic contract manufacturing in those
states.
Competition RMS has a number ofthe
Company's competitors are large corporations or conglomerates, which may have
greater resources to withstand downturns in the Midwesthand-held computer and aroundset-top
box markets, invest in new technology and capitalize on growth opportunities.
These competitors, like the country. SomeCompany, aggressively seek to improve their yields
by way of these firms, like Morey Corporation or Solectron,increased market share and cost reduction.
The Company's interactive cable system competes with cable television companies,
pay-per-view outlets such as On Command and others. Primary competitive factors
in our markets include selection, convenience, accessibility, customer service
and reliability.
We believe we can compete favorably in all of our markets. Most of our
competitors are well establishedlarger than us and well capitalized. However,have much greater financial resources. No
assurance can be given that such increased competition will not have an adverse
effect on our business.
Customer Dependence
While the Company continues to market to a variety of companies in many
different industries, two customers accounted for approximately 87% of total
revenues for 2001. Motorola, Inc. accounted for approximately 45% of total
revenue for the year 2001 and approximately 53% of total revenues for the year
2000. This customer has itself suffered a reduction in revenue and as a result
has not been issuing new purchase orders for design services. Because of the
loss of future orders, in the first quarter of 2002, the Company laid off the
majority of these firms are located outsideits engineering staff. Another customer, Hellenic Telecommunications
Organization S.A. (OTE), accounted for approximately 42% of total revenues in
2001, as a result of fourth quarter sales of set-top boxes.
Research and Development
Substantially all of the Midwest. Also, mostCompany's research and development efforts relate to
the development of RMS'
competitors do not have engineering capability on staff to offer to
their customers. Management believes that lack of a major competitorhandheld computers and set-top boxes. To compete in the
Midwest and the engineering capacity of RMS pose an opportunity to
capture a leadership position in this market.
Customer Dependence To date, three customers represent over 70% of
gross sales revenue for RMS. On January 5, 1998, RMS recruited a sales
manager, whose sole responsibility is to bring additional clients and to
diversify RMS' customer base (See "Sales and Marketing" above).
Patents, Copyrights and Trademarks RMS regularly assists its customers
in registering patents on designs devised by its staff. In such cases,
RMS's engineer is identified as the inventor or co-inventor with rights
assigned to the customer. The RMS logo is both a registered trade and
service mark.
THE CADSERV ACQUISITION On September 4, 1997,highly competitive hardware markets, the Company executedmust continue to develop
technologically advanced products. The Company's total research and development
expenditures were approximately $2,434,000, $1,427,000and $510,000 in 2001, 2000
and 1999, respectively. The Company has retained all rights and intellectual
property acquired during the development of their handheld products and
peripheral devices, and anticipates protecting all intellectual property
developed as a letterresult of understandingwork being done on the Company's set-top boxes.
Production
Because the main components of the Company's products are complex, the assembly
of the motherboards is outsourced to acquire CADserv, an electronics design
services firm located in Schaumburg, Illinois. Since its founding in
1986, it has been engaged in the design of printed circuit boards
("PCBs"), engineering services and sub-contracting of PCB
manufacturing and electronic assembly. CADserv's customers include
several Fortune 500 companiesvarious subcontractors located in the
Midwest. CADserv provided
designUnited States and engineering services toin Southeast Asia. Additionally, final assembly and the first
level of testing is performed by the subcontractors. The Company's proprietary
software is loaded by the subcontractor. The Company during developmentdoes final testing and
re-designmodifications.
Source and Availability of Raw Materials
Component parts are obtained from suppliers around the world. Components used in
all designs are state of the DTR products. Management believes that by acquiring
CADserv, which presently utilizes unrelated suppliersart and vendorsare Year 2000 compliant. Components such as
the latest mobile Intel processors, color video controllers and CACHE memory
chips are in completing assembly work, the Company will be able to capture assembly
work for RMS, while enabling CADservhigh demand and RMS to work conjunctivelyare, thus, available in short supply. However, once
production has begun, management does not anticipate delays in the design, development and manufacture of electronic products. CADserv
presently is wholly-owned by the Company's CEO/ President, Andrew J.
Kandalepas, and employs Mr. Kandalepas and Company Director Andrew
Prokos as its President and Vice-President, respectively. The
acquisition is conditioned upon Company Board of Directors' approval and
procurement of necessary financing. As of the date hereof, the proposed
acquisition has not been presented to the Board, no valuation or price
has been determined and no definitive agreements have been entered.
SOFTWARE LICENSING AGREEMENTSproduction
schedule.
Software Licensing Agreements
The Company has purchasedis leasing BIOS (basic input/output software) for OrasisTMOrasis(R) from
Phoenix Technologies Ltd. ("Phoenix"). Phoenix designs, develops, markets and
licenses proprietary compatibility software products for original equipment manufacturers including BIOS (basic input output system) and
related system software for personal computers. A Master License Agreement was executedsigned
for the right of distribution of Phoenix software with the OrasisTM product.software. The Company pays $4 per unit
sold for this license.
The Company has entered into a Pen Products Original Equipment Manufacturing
Distribution License Agreement and
Sublicense27
Sub-license Agreement for Dedicated Systems with Annabooks Software L.L.C.LLC
("Annabooks"), the supplier of products offered by Microsoft Corporation
("Microsoft"). Microsoft is the third-party beneficiary under these agreements.
Under the terms of these agreements, the Company is authorized to install Microsoft's DOS,
Windows 3.11, Windows 95, 98, 2000 and NT, and Windows for Pen, among others, on the computers
it sells. For this right, the Company must pay Microsoft through Annabooks royalties for each unit
sold, withalthough quantity discounts are available. CUSTOMER DEPENDENCE DuringThe Company pays approximately
$78 per license for each computer it sells.
Patents, Copyrights and Trademarks
In view of rapid technological and design changes inherent to the 18 months ended July 23, 1997, during
whichcomputer
industry, the Company operated under Chapter 11 as a Debtor-in-Possession
and wasdoes not believe that, in a dormant stage for all practical purposes. For this reason,general, patents and/or
copyrights are an effective means of protecting its interests. However, due to
the unique configuration of the Orasis(R), the Company has no current customer base. The effect of the bankruptcy
proceeding on past or potential future customers cannot be determined.
EMPLOYEESdid patent its mechanical
design and processor upgradability concepts. It also expects to patent its
set-top box design following development. The Company presently has approximately ten employees. These
employees are executives, sales, production, technical supportalso attempts to maintain
its proprietary rights by trade secret protection and administrative personnel. Noneby the use of
non-disclosure agreements. It is possible that the Company's personnel are
representedproducts could be
duplicated by competitors and duplication and sale could therefore adversely
affect the Company. However, management believes that the time spent by
competitors engineering the product would be too long for the rapidly changing
computer industry. In 1997 the Company applied for and received a union. Management believes its employee relations to
be good.trademark on
the name "Orasis."
DESCRIPTION OF PROPERTY
FACILITIES The Company'sOur executive offices consist of 7,300 square feet of office space
and 2,700 square feet of warehouse space located at 800 E. Northwest Hwy.,Hwy, Suite 950, Palatine, Illinois 60067. The Company
paysWe pay
approximately $10,000 per month to rent the facilities. In December 1998, in
conjunction with upgrading the facilities, we signed a five-year lease
extension. The lease iscalled for a three year term commencing May 15, 1996, with a five year
renewal option. The Company believesincreased rent, but provided for reconstruction
of facilities to better suit our needs. We believe the space will be adequate
for the foreseeable future. In addition, the Company operates a branch office
consisting of 2,800 square feet at II Merarchias 2 Street and Aki Miaouli, 185
35, Piraeus, Greece. The Company's wholly-owned subsidiary,lease is for 2 years and the monthly rent is $2,800.
RMS occupies a facilityfacilities are located at 1809 South Route 31, McHenry, Illinois
60050. The facilities are
leased from Enclave Corporation, an Illinois corporation wholly-owned by
Richard M. Schultz, President of RMS. RMS occupies 53,000 square feet of space, of which 7,000 square feet is
for office space and 5,000 square feet represent
the clean room facility built for theis surface mount portion of production.
The lease iswas for a five-year term commencing June 1, 1997,ending on May 31, 2002 with an optional
extension for an additional five years Monthlyyears. The rent is approximately $14,000.$16,000 per
month. The Company will not renew the lease.
ADD facilities are located at 937 N. Plum Grove Road, Schaumburg,
Illinois 60173. The approximately 5,500 square feet of office space is owned by
the Company.
Suncoast. facilities are located at 150 Dunbar Avenue, Oldsmar, Florida
34677. Suncoast occupies 3,000 square feet of space of which 1,500 square feet
is for office space and 1,500 square feet is warehouse. The current lease
expires in July 2002 and is renewable for three years. The rent is approximately
$1,800 per month. The Company believes the space will be adequate for the
foreseeable future.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERSDirectors and Executive Officers
The following table sets forth the name, age and position, of each Directorpresent
principal occupation and Executive Officer of the
Company. All Directors are elected annually and hold office until the
next annual meeting of the stockholders of the Company or until their
successors have been elected and qualified. Executive Officers are
appointed by the Board of Directors.
Name Age Present Office
Andrew J. Kandalepas 46 Chairman of the Board of Directors
Chief Executive Officer, President
Savely Burd 34 Chief Financial Officer
Jeffrey L. Goldberg 45 Secretary, Director
Wm. Paul Bunnell 39 Director, Director of Acquisitions
Gary E. Soiney 57 Director
Douglas P. Morris 41 Director
Andrew Prokos 35 Director
Dean F. Prokos 33 Director
Set forth below are descriptions of the backgrounds of the Directors and
Executive Officers of the Company and their principal occupationsemployment history for the past five years.years for each of
our directors and executive officers, as of October 31, 2001.
Name Age Present Office
Andrew J. Kandalepas 50 Chairman of the Board of Directors
Chief Executive Officer
Christopher L. Geier 40 Executive Vice President
Harry L. Lukens, Jr. 51 Vice President, Chief Financial Officer
and Assistant Secretary
28
Jeffrey L. Goldberg 50 Secretary, Director
Gary E. Soiney 61 Director
Mary Ellen W. Conti, MD 57 Director
Mr. Kandalepas joined the CompanyDauphin as Chairman of the Board in February
1995. He was named CEO and President of Dauphin in November of 1995. In
addition, Mr. Kandalepas is the founder and President of CADserv.CADserv, engineering
services firm. Mr. Kandalepas graduated from DeVry Institute in 1974 with a
Bachelor's Degree in Electronics Engineering Technology. He then served as a
product engineer at GTE for two years. Mr. Kandalepas left GTE to serve ten
years as a supervisor of PCB design for Motorola prior to founding CADserv.CADserv in
1986.
Mr. BurdGeier is Executive Vice President reporting directly to
Dauphin's CEO. Mr. Geier leads Dauphin's overall organization, including its
subsidiaries. Prior to joining Dauphin, Mr. Geier founded and managed several
multimillion-dollar private corporations, as well as a $100 million region of a
large retail distribution company. Mr. Geier earned an MBA from the University
of Chicago Graduate School of Business and a Bachelor of Arts in Criminal
Justice/Pre Law from Washington State University.
Mr. Lukens was appointed Chief Financial Officer of the Company in 1996.
After graduation from the University of IllinoisMay 2000 and named
Assistant Secretary in 1987, Mr. Burd beganMarch 2001. From 1998 until his careerappointment, he served as
a staff auditor at Arthur Andersen LLP. After several
promotionspersonal asset manager for an individual investor. From 1993 until 1998, Mr.
Lukens was Vice President, Treasurer and Chief Financial Officer of Deublin
Company, a career move, Mr. Burdprivately owned international manufacturer. From 1972 until 1993, he
was hiredwith Grant Thornton LLP, serving as a Controller for
Clarklift of Chicago North, Inc., a materials handling equipment dealer.
Before his appointment with the Company, Mr. Burd was employed by
Merrill Lynch. Mr. Burd, a CPA, is a graduate of J. L. Kellogg Graduate
School of Management.partner from 1986 until 1993.
Mr. Goldberg has served as Secretary and a Director since June of
1995. He is also a member of the Audit Committee. Mr. Goldberg is a partnerprincipal
with Jeffrey L. Goldberg and Associates, a financial planning firm and is
currently Chief Executive Officer of Stamford International, a Canadian company.
He is a former principal at Essex. LLC., a financial planning and asset
management firm and at FERS Personal Financial LLC, an international accounting and financial
planning firm. He
previouslyMr. Goldberg formerly served as the President of Financial
Consulting Group, Ltd.LTD., a Northfield, Illinois financial planning firm he founded in that year.
Mr. Goldberg was formerly with alawyer at the Chicago law firm of Goldberg and
Goodman, and prior to that, was a tax senior with Arthur Andersen LLP. He is an
attorney CPA and a Certified Financial Planner.
Mr. Bunnell has served as a Director since June, 1995. He also serves
as Director of Acquisitions and as an active member of the management
team. He previously served as Vice President of Financial Consulting
Group, Ltd., a Northfield, Illinois financial planning firm. Mr.
Bunnell was previously a corporate accounting and financial manager with
expertise in business planning and long range strategic planning.CPA.
Mr. Soiney has served as a Director since November of 1995. He is
also a member of the Audit Committee. Mr. Soiney graduated from the University
of Wisconsin in Milwaukee as a marketing major with a degree in Business Administration. He is
currently a 75% owner in Pension Design & Services, Inc., a Wisconsin
corporation, which performs administrative services for qualified pension plans
to business primarily in the Midwest.
Mr. MorrisMid-West.
Dr. Conti was appointed to the Board of Directors and to the Audit
Committee in September, 2000. Dr. Conti is a Radiation Oncologist and owns and
operates four Radiation Therapy Clinics in the St. Louis, MO. area. She has
practiced in the medical field since 1974 and has been a Director since November, 1995. Hemember of the Planning
and Budget Committee of Memorial Hospital in Belleville, Illinois. Dr. Conti
currently serves as a member of the Board of Directors of Creighton University,
FirstStar Bank Health Care Board, Association of Freestanding Radiation Oncology
Centers and the Accreditation Association for Ambulatory Health Care.
All directors and executive officers are elected annually and hold
office until the next annual meeting of the stockholders or until their
successors have been elected and qualified.
Involvement in Certain Legal Proceedings
There have been no events under any bankruptcy act, no criminal
proceedings and no judgments or injunctions material to the evaluation of the
ability and integrity of any director or executive officer during the past five
years.
Involvement by Management in Public Companies
Mr. Goldberg is alsoChief Executive Officer and Chairman of the ownerBoard of
H & M Capital Investments, Inc. and Hyacinth Resources,Stamford International, Inc., which are privately-held business consulting firms that consult with
privately- and publicly- held companies in matters related to
management, debt and equity financing.trades on the Canadian Dealer Network. Mr.
Morris received his Bachelor
of Arts Degree in Judicial Administration from Brigham Young University
in 1978 and his Masters Degree in Public Administration from the
University of Southern California in 1982.
Mr. Andrew Prokos hasGoldberg also served as a Director since February, 1995. He is
also Vice-President of CADserv,Econometrics, Inc. that was traded on the
over the counter market until October 2000. None of the other Directors,
Executive Officers or Officers has had, or presently has,
29
any involvement with a position he has held forpublic company, other than the past five
years. Mr. Prokos is a graduateCompany.
Indemnification of DeVry Institute with an Associate
Degree in Electronics.
Mr. Dean Prokos has served as a Director since August, 1995. He is the
Regional Manager for the Secretary of State Drivers' Services
Department, a position he has held for the past five years. He attended
Loyola UniversityDirectors and received a degree in Business Management.
INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company hasOfficers
We have adopted a by-
lawby-law provision which stipulates that itwe shall
indemnify any Directordirector or Executive Officerexecutive officer who was or is a party, or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, investigative or administrative, against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him/her in connection with such
action, suit or proceeding, if he/she acted in good faith and in a manner he/she
reasonablereasonably believed to be in, or not opposed to, theour best interest, of the Company, had no
reasonable cause to believe his/her conduct was unlawful; provided, however, no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his/her duty to Company,the company, unless, and only
to the extent that the court in which such action or suit was brought shall
determine upon application the that, despite the adjudication of liability, but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court shall deem proper. These
indemnification provisions are not expected to alter the liability of Directorsdirectors
and Executive Officersexecutive officers under federal securities laws.
FAMILY RELATIONSHIPS Both Andrew Prokos and Dean Prokos are siblings
and cousins30
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth in the format required by applicable
regulations of Andrew J. Kandalepas, President, CEO and Chairman of the
Board of Directors.
OTHER: INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS There have been no
events under any bankruptcy act, no criminal proceedings and no
judgments or injunctions material to the evaluation of the ability and
integrity of any Director or Executive Officer during the past five
years.
EXECUTIVE COMPENSATION
Although the Company does not have a formal Compensation Committee, the
Board of Directors performs the equivalent functions of a Compensation
Committee, and seeks to align compensation with business strategy,
Company value, management initiatives and Company performance. Securities and Exchange Commission regulations mandate disclosure of allthe compensation including salary, bonus and stock options, paid to
Directors andfor
Executive Officers that exceeds $100,000. No Director or
Executive Officer was paid compensation exceeding $100,000 during 1995,
1996 or 1997. Members of the BoardCompany who served in such capacities as of Directors are not compensated for
their participationDecember
31, 2001.
SUMMARY COMPENSATION TABLE
- -----------------------------------------------------------------------------------------------------------------
FISCAL LONG-TERM ALL OTHER
YEAR ANNUAL COMPENSATION COMPENSATION (1) COMPENSATION
ENDED (2)
NAME AND TITLE DEC. 31
-----------------------------------------------------------------------
SALARY BONUS AWARDS PAYOUTS
-----------------------------------
SECURITIES LONG-TERM
UNDERLYING INCENTIVE
OPTIONS (#) PLAN PAYOUTS
($)
- -----------------------------------------------------------------------------------------------------------------
Andrew J. Kandalepas 2001 $195,000 $ -0- -0- -0- $5,000
Chairman, CEO and 2000 195,000 50,000 -0- -0- 5,000
President 1999 84,000 -0- -0- -0- 5,000
Christopher L. Geier(3) 2001 $185,000 -0- -0- -0- -0-
Executive 2000 185,000 -0- -0- -0- -0-
Vice-President 1999 65,585 -0- -0- -0- -0-
Harry L. Lukens, Jr.(4) 2001 $175,000 -0- -0- -0- -0-
Chief Financial Officer, 2000 106,000 -0- -0- -0- -0-
Assistant Secretary
- -----------------------------------------------------------------------------------------------------------------
(1) The Company presently has no long-term compensation
arrangements and had no such plans during fiscal years 1999
through 2001.
(2) The amounts disclosed in managementthis column consist of Company
discretionary contributions to the Company's 401(k) Plan and
insurance premiums paid by the Company. The Company made no
discretionary contributions to the 410(k) Plan in fiscal years
1999 through 2001.
(3) Mr. Geier commenced employment in March 1999 and therefore,
the compensation shown for him for 1999 is for the period from
March 1999 through December 1999.
(4) Mr. Lukens commenced employment in May 2000 and therefore, the
compensation shown for him for 2000 is for the period from May
2000 through December 2000.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
CADserv, is wholly-ownedan engineering services company based in Schaumburg, Illinois,
controlled by Company CEO/President, Andrew J. Kandalepas.
CADserv employs Mr. Kandalepas, Chief Executive Officer and Company Director Andrew Prokos as its
President and Vice-President, respectively. CADserva major
shareholder, has contributed to the design, packaging and developmentmanufacturing of the
Company's DTROrasis(R) and OrasisTM product
lines and has been compensatedassisted the Company in the design of the set-top box. The Company
paid $72,573 in 2001 for such services on substantially the
same terms which could be obtained from non-related companies in the
marketplace. On September 8, 1997, the Company entered into a letter of
understanding with Mr. Kandalepas pursuant to which the Company proposed
to acquire all issued and outstanding shares of stock in CADserv at a
price to be determined by an independent third party appraiser. The
acquisition is subject to Company's Board of Directors' approval and
procurement of necessary financing. At of the present date, the
transaction has not been presented to the Board, nor has any valuation
or price been determined.
Theservices.
RMS facilities of the Company's wholly-owned subsidiary, RMS, are leased from Enclave Corporation, an Illinois corporation wholly-owneda company that is
owned by Richard M. Schultz,the former President of RMS.RMS whose contract with the Company was
terminated on May 14, 1999. The Company paid $182,337 of rent and $32,380 in
real estate taxes for the property lease isin 2001, $179,468 of rent and $30,206
of real estate taxes for a five-year term
commencing June 1, 1997, with a monthly basethe property lease in 2000 and $179,684 of $14,000.rent and
$24,150 of real estate taxes for 1999.
31
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding Common
Stockas of December 31, 2001, the number and
percentage of outstanding shares of the CompanyCompany's common stock beneficially
owned beneficially as of March 13, 1998, by (i) each Director and Executive Officer of the Company,and Director, (ii) all DirectorsExecutive Officers
and Executive OfficersDirectors as a group, and (iii) each personall persons known by the Company to own
beneficially own more than 5% of the Common StockCompany's common stock. Beneficial ownership
has been determined in accordance with Rule 13d-3 under the Exchange Act. Under
this rule, certain shares may be deemed to be beneficially owned by more than
one person (if, for example, persons share the power to vote or the power to
dispose of the Company:
Name and Addressshares). In addition, shares are deemed to be beneficially owned
by a person if the person has the right to acquire the shares (for example, upon
exercise of Amount and Naturean option or warrant) within 60 days of %the date as of Beneficial Owner Position Beneficial Shares Owned Class
- ---------------------------- ------------- ---------------------- --------
Andrew J. Kandalepas Chairman, Chief
770 Michigan Ave. Executive Officer
Elk Grove Village, IL 60007 & President 5,309,337 (1) 14.3%
Savely Burd
9445 Kenton, #411 Chief Financial
Skokie, IL 60076 Officer 58,000 0.2%
Jeffrey L. Goldberg
2800 Acacia Terrace
Buffalo Grove, IL 60089 Secretary, Director 1,248,388 (2) 3.4%
Wm. Paul Bunnell
637 Constitution Dr., #5
Palatine, IL 60077 Director 1,248,388 (2) 3.4%
Gary E. Soiney
4524 Maple Rd.
East Troy, WI 53120 Director 0 0.0%
Douglas P. Morris
515 Red Cyprus Dr.
Cary, IL 60013 Director 301,167 (3) 0.8%
Andrew Prokos
2359 N Windsor Drive
Arlington Hts., IL 60004 Director 204,000 0.6%
Dean F. Prokos
415 Pheasant Ridge Drive
Lake Zurich, IL 60047 Director 0 0.0%
Hyacinth Resources, Inc.
515 Red Cyprus Dr.
Cary, IL 60013 ------ 290,000 (3) 0.8%
Northfield Technology Group
790 Frontage Rd.
Northfield, IL 60093 ------ 1,248,388 (2) 3.4%
H & M Capital Investment, Inc.
330 E. Maine St.
Barrington, IL 60010 ------ 11,167 (3) 0.0%
Marinis Loukas Trust
322 N. Prospect Rd.
Park Ridge, IL 60068 ------ 1,982,500 (1) 5.4%
Morgan Stanley, Dean
Witter & Co Trustee 7,133,500 19.3%
---------- -----
Officers and Directors and
5% Beneficial Owners (as a group) 14,555,559 39.3%
1 The 5,309,337which the
information is provided; in computing the percentage ownership of any person,
the amount of shares listed for Andrew J. Kandalepasis deemed to include the amount of shares held individually, 30,650 shares heldbeneficially
owned by CADServ, and
1,982,500 shares heldsuch person (and only such person) by Marinis Loukas Trust, for which
Mr. Kandalepas has voting but no pecuniary interest in such shares.
2 The shares listed for Jeffrey L. Goldberg and Wm. Paul Bunnell
include 1,248,388 shares held by Northfield Technology Group.
Messrs. Goldberg and Bunnell share votingreason of these shares.
3 Douglas P. Morris is Presidentacquisition
rights. As a result, the percentage of H & M Capital Investments, Inc.outstanding shares of any person as shown
in the following table does not necessarily reflect the person's actual voting
power at any particular date.
Amount and Nature Percent of
of Beneficial Shares of
Name Title Ownership Common Stock
- -------------------------------------------------------------------------------------------------------------
Andrew J. Kandalepas Chairman, Chief
Executive Officer
& President 4,526,337 (1) 6.6%
Harry L. Lukens, Jr. Chief Financial
Officer, Asst. Secretary 480,000 (2) *
Jeffrey L. Goldberg Secretary, Director 80,000 (3) *
Christopher L. Geier Executive Vice-
President 1,000,000 (4) 1.4%
Gary E. Soiney Director 80,000 (5) *
Mary Ellen Conti, M.D. Director 164,500 (6) *
Crescent International, Ltd. 6,605,977 (7) 9.2%
----------- -------
Executive Officers, Directors and 5%
Beneficial Owners as a group (7 persons) 12,912,514 (8) 18.0%
=========== =======
- -----------------------
* Less than 1%
(1) Includes options to purchase 1,150,000 shares under options
immediately exercisable.
(2) Includes options to purchase 480,000 shares under options immediately
exercisable.
(3) Includes options to purchase 80,000 shares under options immediately
exercisable.
(4) Includes options to purchase 1,000,000 shares under options
immediately exercisable.
(5) Includes options to purchase 80,000 shares under options immediately
exercisable.
(6) Includes options to purchase 40,000 shares under options immediately
exercisable.
(7) Assumes exercise of all shares being registered under the Convertible
Note and Hyacinth Resources, Inc., which own 11,167Incentive Warrant.
(8) Includes options to purchase 2,840,000 shares and 290,000
shares, respectively.under options
immediately exercisable.
DESCRIPTION OF CAPITAL STOCK
The Company's32
Our authorized capital stock consists of 100,000,000 Sharesshares of Common Stock,$0.001
par value $0.001 per share ("Common Stock")common stock and 10,000,000 Sharesshares of Preferred Stock,$0.01 par value $0.01 per share ("Preferred
Stock").preferred stock.
As of March 13, 1998May 28, 2002 there were 36,305,09665,050,646 shares of Common
Stockcommon stock outstanding and
beneficially owned by approximately 3,00020,000 beneficial stockholders,shareholders, and no
Sharesshares of Preferred Stockpreferred stock were outstanding. The following summary is qualified
in its entirety by reference to the Company's Certificateour certificate of Incorporation,incorporation, which is
available from the Company.
COMMON STOCK Theupon request.
Common Stock
possesses ordinary voting rights for the
electionThe holders of Directors and in respect of other corporate matters, each
share beingcommon stock are entitled to one vote. There are no cumulative voting rights,
meaningvote for each share
held of record on all matters submitted to a vote of the shareholders. Subject
to preferences that themay be applicable to any then outstanding preferred stock,
holders of a majority of the Shares voting for the
election of directors can elect all the directors if they choose to do
so. The Common Stock carries no preemptive rights and is not
convertible, redeemable, assessable, or entitled to the benefits of any
sinking fund. The holders of Common Stockcommon stock are entitled to dividends inreceive ratably such amounts and at such timesdividends as may be
declared by the Board of Directors out of funds legally available therefor. See "Market Price
for Common Stock and Dividend Policy" for information regarding dividend
policy. Uponavailable. In the event
of a liquidation, dissolution or winding up of the Company,
thecompany, holders of Common Stockthe
common stock are entitled to receiveshare ratably the netin all assets of the Company availableremaining after payment
of liabilities and the liquidation preference of any then outstanding preferred
stock. Holders of common stock have no right to convert their common stock into
any other securities and have no cumulative voting rights. There are no
redemption or provision for payment
of all debts and other liabilities, subjectsinking fund provisions applicable to the prior rights of anycommon stock. All
outstanding Preferred Stock.
In February 6, 1996, the Company entered into an agreement with Victor
I. Baron, Savely Burd and Interactive Controls, Inc., an Illinois
corporation ("Intercon"). Under the terms of the agreement, the Company
acquired a business plan devised by Intercon for the design and
manufacture of industrial control systems and software. The Company also
agreed to employ Messrs. Baron and Burd and provided Intercon the
opportunity to receive (a)1,000,000 shares of Common Stock the first
fiscal year the Company realizes aggregate gross revenues of $5,000,000;
(b) an additional 200,000 shares of Common Stock for each additional
$1,000,000 in gross sales revenues exceeding $5,000,000common stock are fully paid and up to
$10,000,000; and (c) an additional .25 shares of Common Stock for each
dollar in net earnings before taxes. The aggregate number of shares
issued under the Intercon agreement may not in any event exceed 25% of
the Company's shares outstanding as of the effective date of its Plan of
Reorganization and are subject to trading restrictions. To date, no
Intercon products have been developed or produced under the business
plan and no shares have been issued to Intercon. Mr. Burd continues to
serve as an employee and Chief Financial Officer of the Company. Mr.
Baron's employment with the Company terminated on February 24, 1998.
PREFERRED STOCK The Board of Directors of the Company is empowered,
without approval of the stockholders, to cause Shares ofnon-assessable.
Preferred Stock
toThe preferred stock may be issued in one or more series, with the numbersterms of
Shares of each
series towhich may be determined at the time of issuance by it. Thethe Board of Directors,
is authorized to
fixwithout further action by shareholders, and determine variations in the designations, preferences, and
relative, optional or other specialmay include voting rights (including
without
limitation, special votingthe right to vote as a series on particular matters), preferences as to
dividends and liquidation, conversion and redemption rights preferential rights to receive
dividends or assets upon liquidation, rights of Conversion into Common
Stock or other securities, redemption provisions and sinking fund
provisions) between series and between the Preferred Stock or any series
thereof and the Common Stock, and the qualifications, limitations or
restrictions of such rights; and the Shares of Preferred Stock or any
series thereof mayprovisions. We have full or limited voting powers or be without
voting powers.
Although the Company has indicated that it has no present intentionplans to issue Shares of Preferred Stock,preferred stock. However, the
issuance of Sharesany such preferred stock could affect the rights of Preferred
Stock or the issuanceholders of
common stock and reduce the value of the common stock. In particular, specific
rights granted to purchase such Shares,future holders of preferred stock could be used to discourage an unsolicited acquisition proposal. For instance,restrict
our ability to merge with or sell our assets to a third party, thereby
preserving control of the issuancecompany by present owners.
Warrants and Options
As of May 28, 2002 warrants to purchase 8,265,411 shares of common
stock were issued and outstanding in the hands of approximately 60 investors.
These warrants are convertible at any time. The strike prices of these warrants
range from $0.20 to $5.481. The warrants expire between three and five years
from the date of issuance. The warrants include a serieschange of Preferred Stock might impedeform provision in
them so that if a business
combination by including class voting rights that would enablechange in the form of the common stock occurs due to stock
splits, stock dividends, or mergers, the holders are entitled to block suchreceive a
Conversion; or such issuance might facilitatepro-rata increase of shares at a business combination by including voting rights that would provide a
required percentage vote of the stockholders. In addition, under certain
circumstances, the issuance of Preferred Stock could adversely affect
the voting power ofdiscounted price. However, the holders of the
Common Stock. Althoughwarrants do not have any voting rights and are not entitled to receive any cash
or property dividends declared by the Board of Directors is required to make any determination to issueuntil they convert the
warrants into common shares. At the time such stock
based on its judgments as towarrants are exercised, the best interests of the stockholderscommon
shareholders' ownership percentage of the Company will be diluted. In December
2000, the BoardCompany re-priced approximately 3,012,000 warrants it had previously
issued to outside consultants. The warrants were originally issued with an
exercise price ranging from $10.00 to $5.00, and were re-priced with exercise
prices ranging from $5.00 to $2.00 per share. The re-pricing created a charge to
earnings of Directors could actapproximately $234,000. In March 2002, the Company re-priced an
additional 1,023,000 warrants creating a charge to earnings of approximately
$27,218.
As of May 28, 2002 there are a total of 5,605,562 options issued and
outstanding in a manner that would
discourage an acquisition attempt or other Conversion that some or a
majoritythe hands of more than thirty employees and former employees.
These options are exercisable at any time into the Company's $0.001 par value
common stock. The per share strike prices of these options range from $0.50 to
$3.875. These options expire three years from the date of issuance. At the time
such options are exercised, the common shareholders ownership percentage of the
stockholders might believe toCompany will be in their best interests
or in which stockholders might receive a premium for their stock over
the then market price of such stock. The Board of Directors does not at
present intend to seek stockholder approval prior to any issuance of
currently authorized stock.
SHARE TRANSFER RESTRICTIONS
To assist the Company in attempting to maintain an orderly trading
market, Messrs. Kandalepas, Goldberg, Bunnell, Morrisdiluted.
Transfer Agent and Loukas (the
"Restricted Persons") have entered into a Share Transfer Restriction
Agreement whereby they have agreed to limit the collective sales of
Company Shares by them individually, and by any entity controlled by
them, in market transactions to an aggregate of 50,000 Shares per
calendar month.
The Share Transfer Restriction Agreement has a term of two years ending
on May 31, 1998. The restriction on transfers is limited to public
market transactions effected through a broker-dealer. There are no
restrictions on privately negotiated transactions which are not effected
through a broker-dealer, provided, however, that the transferee agrees
to be bound by the terms and conditions of the Share Transfer
Restriction Agreement. Although a substantial number of the shares
which are subject to the transfer restrictions contained in the Share
Transfer Restriction Agreement are held by control persons subject to
trading volume limitations, a substantial increase in the number of
shares available for public sales will occur upon expiration of the
Share Transfer Restriction Agreement. While none of the parties to the
Share Transfer Restriction Agreement has expressed a present intent to
sell any shares upon expiration of the Share Transfer Restriction
Agreement, there can be no assurance that such sales will not occur. In
the event of such sales, the the market price of Shares may decrease
substantially and Selling Stockholders may not be able to find buyers
should they decide to offer their Shares for sale, or may be unable to
find buyers willing to pay the price sought.
Any shares issued under the Intercon agreement are subject to a one-year
trading restriction as well as holding, volume and other restrictions
under Securities and Exchange Commission Rule 144. In general, under
Rule 144, if a period of at least one year has elapsed between the date
on which restricted shares are acquired from the Company or the date
they were acquired from an affiliate, the holder , including an
affiliate, is entitled to sell a number of shares within any three-month
period that does not exceed the greater of (a) one percent of the then
outstanding shares of Common Stock in the Company; or (b) the average
weekly reported trading volume of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also
subject to certain requirements pertaining to the manner of such sales,
notices of such sales and availability of public information regarding
the Company. Under Rule 144(k), if a period of at least two years has
elapsed between the later of the date on which restricted shares were
acquired from the Company or an affiliate, a holder of such restricted
shares who is not an affiliate and who has not been an affiliate for at
least three months prior to the sale, is entitled to sell the shares
immediately without regard to the volume limitation sand other
conditions referenced above.
TRANSFER AGENT AND REGISTRAR TheRegistrar
Our transfer agent and registrar for the
Company's Shares is American Stock Transfer and Trust
Company, 40 Wall
Street,59 Maiden Lane, Plaza Level, New York, NY 10005New York 10038 (212) 936-5100.
PLAN OF DISTRIBUTION
33
We are registering 6,605,977 shares of common stock on behalf of
Crescent International Ltd. The Company is registering 7,487,935 Shares of Common Stock for the
Selling Stockholders. All costs, expenses and fees (estimated to be not
more than $30,493) in connection with the registration of the Shares
offered hereby, will be borne by the Company. Brokerage commissions, if
any, attributable to the sale of the Shares by the Selling Stockholders
will be borne by the Selling Stockholders. The Company will not receive
any proceeds from the sale of Shares by Selling Stockholders. The
Company intends to use Shares registered for future acquisitions, to
raise capital, if needed, to fund production of the OrasisTM hand-held
computer and RMS contract manufacturing operations, and to expand the
Company's product and service offerings. At the present time, the
Company is not engaged in any material negotiations with any specific
enterprise regarding any acquisition, other than CADserv.
The Selling Stockholders' sale of Sharesshares are shares that may be madeacquired by it
through the exercise of warrants and the conversion of a convertible note.
The selling shareholder may sell its shares from time to time at prices
and at terms prevailing at the time of sale. The selling shareholder may
exercise its 700,000 warrants from time to time prior to expiration. As of June
11, 2002, we would have received $914,480 from the exercise of such warrants if
all are exercised prior to expiration. We will receive none of the proceeds of
any subsequent sale of shares issued under the warrants or conversion of the
Convertible Note.
Crescent is contractually restricted from engaging in transactions (whichshort sales of
our common stock and has informed us that it does not intend to engage in short
sales or other stabilization activities.
Sales may include block transactions) inbe made on the over-the-
counterover-the-counter market or otherwise at prices
and at terms then prevailing or at prices related to the then current market
price, or in negotiated private transactions, or in a combination of such
methodsthese
methods. The selling shareholder will act independently of us in making
decisions with respect to the form, timing, manner and size of each sale. We
have been informed by the selling shareholder that there are no existing
arrangements between the selling shareholder and any other person, broker,
dealer, underwriter or agent relating to the sale or at negotiated prices.distribution of shares of
common stock which may be sold by selling shareholder through this prospectus.
The Selling Stockholdersselling shareholder may also transferbe deemed an underwriter in connection with resales
of its shares.
The common shares may be sold in one or more of the following manners:
. a block trade in which the broker or dealer so engaged will
attempt to sell the shares as agent, but may position and
resell a portion of their Shares registered pursuantthe block as principal to facilitate the
transaction;
. purchases by a broker or dealer for its account under this
prospectus;
. ordinary brokerage transactions and transactions in which the
broker solicits purchases, or
. privately negotiated transactions.
In effecting sales, brokers or dealers engaged by the selling
shareholder may arrange for other brokers or dealers to participate. Except as
disclosed in a supplement to this Prospectus by way of gifts or other gratuitous transactions.
The Selling Stockholders may effect transactions by selling Shares
directly to purchasers or to or though broker-dealers which may act as
agents or principals. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the Selling
Stockholders and/or the purchasers of the Shares for whom such broker-
dealers may act as agents or to whom they sell as principals, or both.
The Selling Stockholders and any broker-dealers that actprospectus, no broker-dealer will be paid more
than a customary brokerage commission in connection with theany sale of the Shares might be deemedcommon
shares. Brokers or dealers may receive commissions, discounts or other
concessions from the selling shareholder in amounts to be an "underwriter"
withinnegotiated immediately
prior to the meaningsale. The compensation to a particular broker-dealer may be in
excess of Section 2(11)customary commissions. Profits on any resale of the Securities Actcommon shares as a
principal by such broker-dealers and any commissions received by them and any profit on the resale of the Shares
as principal mightsuch
broker-dealers may be deemed to be underwriting discounts and commissions under
the Securities Act.
BecauseAct of 1933. Any broker-dealer participating in such transactions
as agent may receive commissions from the Selling Stockholdersselling shareholder (and, if they act
as agent for the purchaser of such common shares, from such purchaser).
Broker-dealers may agree with the selling shareholder to sell a
specified number of common shares at a stipulated price per share, and, to the
extent a broker dealer is unable to do so acting as agent, to purchase as
principal any unsold common shares at a price required to fulfill the
broker-dealer commitment to the selling shareholder. Broker-dealers who acquire
common shares as principal may thereafter resell such common shares from time to
time in transactions (which may involve crosses and block transactions and which
may involve sales to and through other broker-dealers, including transactions of
the nature described above) in the over-the-counter market, in negotiated
transactions or otherwise at market prices prevailing at the time of sale or at
negotiated prices, and in connection with such resales may pay to or receive
from the purchasers of such common shares commissions computed as described
above. Brokers or dealers who acquire common shares as principal and any other
participating brokers or dealers may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, the Selling
Stockholders will be subject to Prospectus delivery requirement under
the Securities Act. Furthermore, in the event of a "distribution" of
his or her Shares, such Selling Stockholders, any selling broker or
dealer and any "affiliated purchasers" may be subject to Rule 10b-6
under the Exchange Act until his or her participation in the
distribution is completed. In addition, Rule 10b-7 under the Exchange
Act prohibits any "stabilizing bid" or "stabilizing purchase" for the
purpose of pegging, fixing or stabilizing the price of Common Stockunderwriters in connection
with resales of the offering.
There is no assurance that the Selling Stockholderscommon shares.
In addition, any common shares covered by this prospectus which qualify
for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to
this prospectus. We will be able to sell
all ornot receive any of the Shares or that buyersproceeds from the sale of Shares,these
common shares, although we have paid the expenses of preparing this prospectus
and the related registration statement of which it is a part.
34
The selling shareholder will pay all commissions and its own expenses,
if any, will be
willingassociated with the sale of their common shares, other than the expenses
associated with preparing this prospectus and the registration statement of
which it is a part.
SELLING SHAREHOLDER
The following table provides certain information with respect to pay prices soughtthe
common stock beneficially owned by Selling Stockholders.
SELLING STOCKHOLDERSCrescent International Ltd., who is
classified as a selling shareholder and is entitled to use this prospectus. The
Shares to be registered hereunder were issuedinformation in accordance with a
private placement during 1997, pursuant to which the holderstable is as of Shares
were granted certain registration rights. The Shares are being
registered to remove their restricted status under the 1933 Act.date of this prospectus. Although the
Selling Stockholders haveselling shareholder has not advised the Company that they
currently intendus of its intent to sell Sharesshares pursuant to
this registration and after conversion of the Selling Stockholdersnote to shares, it may choose to
sell all or a portion of the Sharesshares from time to time in the over-the-counter
market or otherwise at prices and terms then prevailing or at prices related to
the current market price, or negotiated transactions. The Selling Stockholders consist of
138 investors, each of whom was represented asselling shareholder is
not nor has been an accredited investor at
the time of subscription for Shares, and none of whom who are or have
been affiliatesaffiliate of the Company or who holdholds more than 5% of the
outstanding Common Stock.
shares.
Beneficially
Beneficially Registered BeneficiallyOwned Owned Registered Shares
Owned Shares OwnedBeneficially Shares Ownedto be Shares Beneficially Owned
To beOwned Registered to be Sold After Registration
Name Number % Number % Number Number %
- ---- ------ - ------ - ------ ------ -
Kenneth M. Anderson 10,000 0.1% 10,000 0.1%Crescent International Ltd. 0 10,000 0.1%
Lowell K. Anderson 25,000 0.1% 25,000 0.1%0.0% 6,605,977 9.2% 0 25,000 0.1%
David R. Appert M.D.
TTEE OSL Profit 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
Badger Coaches, Inc. 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Norman C. Barsanti 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Delaware Charter
FBO Seymour Berman IRA 8,000 0.1% 8,000 0.1% 0 8,000 0.1%
Michael Blumenfeld 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
Jonathan R. Borren 22,500 0.1% 22,500 0.1% 0 22,500 0.1%
Paul Brosseit 26,000 0.1% 26,000 0.1% 0 26,000 0.1%
Burpee Co. 50,000 0.1% 50,000 0.1% 0 50,000 0.1%
Chiropractic Medicine
and Associates of
DuPage (Forman) 8,000 0.1% 8,000 0.1% 0 8,000 0.1%
Roger L. Collins and
Sandra R. Collins 35,000 0.1% 35,000 0.1% 0 35,000 0.1%
Mike P. Darraugh 45,000 0.1% 45,000 0.1% 0 45,000 0.1%
Steve Daugherty 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Resources Trust Co.
FBO Steve Daugherty IRA 16,000 0.1% 16,000 0.1% 0 16,000 0.1%
Frank A. Davenport
Trust DTD 9/25/81 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
Scott Davis 15,000 0.1% 15,000 0.1% 0 15,000 0.1%
Delaware Charter
FBO Andre Lareau 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Delaware Charter
FBO Patrick J. Rodgers 15,000 0.1% 15,000 0.1% 0 15,000 0.1%
John Doyle 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Robert Ellis 26,300 0.1% 26,300 0.1% 0 26,300 0.1%
Engel Enterprises, Inc. 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Rick F. Enriquez 200,000 0.1% 200,000 0.1% 0 200,000 0.1%
Henry Erfurth 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
Lisa Marilyn Erwin 5,000 0.1% 5,000 0.1% 0 5,000 0.1%
Spencer Ewald 12,500 0.1% 12,500 0.1% 0 12,500 0.1%
Executive Pension
Design, Inc. Profit
Sharing Plan 99,000 0.1% 99,000 0.1% 0 99,000 0.1%
Resources Trust Co. 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
Richard C. Farmer
IRA C/O Resources
Trust Co. 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
Joseph W. Felger
Carol A. Felger 60,000 0.1% 60,000 0.1% 0 60,000 0.1%
Kirk Ferguson
Suzanne Ferguson 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
Craig Ferguson
Susan Ferguson 5,000 0.1% 5,000 0.1% 0 5,000 0.1%
Michael Fieseler 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Delaware Charter
FBO Michael Fieseler IRA 8,000 0.1% 8,000 0.1% 0 8,000 0.1%
Paul A. Fischer
Annette D. Fischer 20,000 0.1% 20,000 0.1% 0 20,000 0.1%
Jay Fisher 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Dr. Franklin Forman 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Resources Trust Co.
FBO Franklin Forman IRA 15,000 0.1% 15,000 0.1% 0 15,000 0.1%
William C. Frazier 100,000 0.1% 100,000 0.1% 0 100,000 0.1%
William C. Frazier 50,000 0.1% 50,000 0.1% 0 50,000 0.1%
John P. Gahagan 15,000 0.1% 15,000 0.1% 0 15,000 0.1%
Eileen K. Gifford 5,000 0.1% 5,000 0.1% 0 5,000 0.1%
Anne M. Graham 15,000 0.1% 15,000 0.1% 0 15,000 0.1%
Ronald J. Gregorio 165,000 0.1% 165,000 0.1% 0 165,000 0.1%
Delaware Charter FBO
Jeffrey D. Guenther IRA 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Chad R. Hahn 5,000 0.1% 5,000 0.1% 0 5,000 0.1%
Dave Heydenberk 20,000 0.1% 20,000 0.1% 0 20,000 0.1%
Steven A. Holland 15,000 0.1% 15,000 0.1% 0 15,000 0.1%
Steven L. Holtz 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
Impact Associates 20,000 0.1% 20,000 0.1% 0 20,000 0.1%
Jefferson Current
Electric, Inc.
Profit Sharing Plan 20,000 0.1% 20,000 0.1% 0 20,000 0.1%
Jefferson Current
Electric, Inc.
Pension Plan 40,000 0.1% 40,000 0.1% 0 40,000 0.1%
Delaware Charter
FBO Craig G. Johnson 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Melinda Peters-Jones 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Rick Jones 210,000 0.1% 210,000 0.1% 0 210,000 0.1%
Edward H. Keevins 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
Richard G. Kleine 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
John Kluesner
Michelle M. Kluesner 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
Paul Kolbeck 125,000 0.1% 125,000 0.1% 0 125,000 0.1%
Lee Krueger 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
Lake Shore Consulting Group 32,500 0.1% 22,500 0.1% 0 32,500 0.1%
Andre G. Lareau and
Mary R. Lareau 15,000 0.1% 15,000 0.1% 0 15,000 0.1%
James S. Lee 50,000 0.1% 50,000 0.1% 0 50,000 0.1%
Resources Trust FBO Joseph V.
Lemberger IRA 100,000 0.1% 100,000 0.1% 0 100,000 0.1%
David Lentz 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Gary D. Long 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Carl D. Luna and
Marsha L. Luna 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Gary Malek
Money Purchase Plan 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
Resources Trust Co. FBO
William B. Matt IRA 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
Linda M. Mausser 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
David H. Meier 15,000 0.1% 15,000 0.1% 0 15,000 0.1%
Eddie D. Merida 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Michael Milcarek 30,000 0.1% 30,000 0.1% 0 30,000 0.1%
Daniel B. Miller and
Melinda F. Miller 5,000 0.1% 5,000 0.1% 0 5,000 0.1%
Daniel B. Miller and
Nathan D. Miller 5,000 0.1% 5,000 0.1% 0 5,000 0.1%
Elmer J. Miller 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
Ryan Miller 20,000 0.1% 20,000 0.1% 0 20,000 0.1%
Kipton D. Mills 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Daniel E. Mix 20,000 0.1% 20,000 0.1% 0 20,000 0.1%
Delaware Charter FBO
Terry Moffit IRA 7,500 0.1% 7,500 0.1% 0 7,500 0.1%
Sherry Moore 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
William R. Nicholas 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Milos Nikolic 100,000 0.1% 100,000 0.1% 0 100,000 0.1%
Glenn Nitzsche 5,000 0.1% 5,000 0.1% 0 5,000 0.1%
Glenn Nitzsche Custodian
for Brooke Nitzsche 5,000 0.1% 5,000 0.1% 0 5,000 0.1%
Nord Cleaning
Service, Inc. 15,000 0.1% 15,000 0.1% 0 15,000 0.1%
Jerome K. Nord 5,000 0.1% 5,000 0.1% 0 5,000 0.1%
Clint Nord 15,000 0.1% 15,000 0.1% 0 15,000 0.1%
Delaware Charter & Trust
FBO Curt R. Nord IRA 7,000 0.1% 7,000 0.1% 0 7,000 0.1%
Rita Nord 5,000 0.1% 5,000 0.1% 0 5,000 0.1%
Stephen J. Notaro 15,000 0.1% 15,000 0.1% 0 15,000 0.1%
Borel Bank & Trust Company
Custodian FBO 15,000 0.1% 15,000 0.1% 0 15,000 0.1%
Jolanda O'Brien 4,000 0.1% 4,000 0.1% 0 4,000 0.1%
Delaware Charter & Trust
FBO Joanne Panici 5,500 0.1% 5,500 0.1% 0 5,500 0.1%
Steven Pettersen 15,000 0.1% 15,000 0.1% 0 15,000 0.1%
Valie Pettersen 15,000 0.1% 15,000 0.1% 0 15,000 0.1%
Jerry A. Phillips
Living Trust 45,000 0.1% 45,000 0.1% 0 45,000 0.1%
Pommier Construction Co., Inc. 15,000 0.1% 15,000 0.1% 0 15,000 0.1%
Pommier Construction Co., Inc. 15,000 0.1% 15,000 0.1% 0 15,000 0.1%
Brian M. Rafferty 5,000 0.1% 5,000 0.1% 0 5,000 0.1%
Michelle Randolph 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Shari Rhode
Patricia Covington 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
James L. Rose CPA SC
Defined Benefit Plan 38,600 0.1% 38,600 0.1% 0 38,600 0.1%
Jerry W. Sanders 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Lawrence D. Scaro 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Percy Schramek TTEE Emilie
E. Schramek Rev Trust 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
Robert D. Schauenberg
Susan K. Schauenberg 50,000 0.1% 50,000 0.1% 0 50,000 0.1%
Dan Schlapkohl 100,000 0.1% 100,000 0.1% 0 100,000 0.1%
Gary N. Schmedding
Rose Marie Schmedding 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
Brian Schubert 15,000 0.1% 15,000 0.1% 0 15,000 0.1%
Brian Schubert 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
James Senglaub 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
Michael L. Senglaub
Doris A. Senglaub 30,000 0.1% 30,000 0.1% 0 30,000 0.1%
Jeffery W. Senglaub 100,000 0.1% 100,000 0.1% 0 100,000 0.1%
Jeffery W. Senglaub
Charitable Reminder
Unit Trust 160,000 0.1% 160,000 0.1% 0 160,000 0.1%
Ted Smith 50,000 0.1% 50,000 0.1% 0 50,000 0.1%
Charles D. Spagnoli 20,000 0.1% 20,000 0.1% 0 20,000 0.1%
George T. Stathas 50,000 0.1% 50,000 0.1% 0 50,000 0.1%
Resources Trust Co.
FBO George T. Stathas 28,000 0.1% 28,000 0.1% 0 28,000 0.1%
Larry J. Steffen 20,000 0.1% 20,000 0.1% 0 10,000 0.1%
Joseph P. Tate 200,000 0.1% 200,000 0.1% 0 200,000 0.1%
Steve Theofanous 200,000 0.1% 200,000 0.1% 0 200,000 0.1%
Fano Theofanous 150,000 0.1% 150,000 0.1% 0 150,000 0.1%
George G. Thomas 15,000 0.1% 15,000 0.1% 0 15,000 0.1%
David R. Tompos 20,000 0.1% 20,000 0.1% 0 20,000 0.1%
Loren L. Troyer
Kathrine Troyer 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
Delaware Charter FBO
Loren L. Troyer IR 5,000 0.1% 5,000 0.1% 0 5,000 0.1%
Loren L. Troyer Custodian for
Casey N. Troyer 5,000 0.1% 5,000 0.1% 0 5,000 0.1%
Loren L. Troyer Custodian for
Morgan M. Troyer 5,000 0.1% 5,000 0.1% 0 5,000 0.1%
Michael Tucker
Mark Tucker 20,000 0.1% 20,000 0.1% 0 20,000 0.1%
John V. Watson 155,800 0.1% 155,800 0.1% 0 155,800 0.1%
John Randall Wear
Trust DTD 7/8/97 20,000 0.1% 20,000 0.1% 0 20,000 0.1%
Winner Products, Inc. Defined
Benefit Pension Plan 26,652 0.1% 26,652 0.1% 0 26,652 0.1%
Robert A. Wolfe 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
Work Force of America, Inc. 25,000 0.1% 25,000 0.1% 0 25,000 0.1%
David G. Yacullo 10,000 0.1% 10,000 0.1% 0 10,000 0.1%
ACAP Financial Inc. C/O Dauphin
Technology Inc. 131,756 0.1% 131,756 0.1% 0 131,756 0.1%
--------- ---------- ----------
4,548,608 4,548,608 4,548,6086,605,977 9.2%
On September 28, 2001, we entered into a $10 million securities
purchase agreement with Crescent International Ltd., ("Crescent") an
institutional investor managed by GreenLight (Switzerland) SA. The initial
funding was a $2.5 million Convertible Note and warrants exercisable to purchase
700,000 shares of common stock at a price of $1.3064 per share for a five-year
term. The Convertible Note is convertible into common stock at the lower of
(i)$1.1561, which represents 110% of the average of the Bid Prices during the
ten Trading Days prior to September 28, 2001 and (ii)the average of the lowest
three consecutive Bid prices during the 22-day period immediately preceding the
conversion date. If converted as of June 11, 2002, such shares would convert
into 5,905,977 of common stock assuming a conversion price of $0.4233 per share.
The Company and Crescent had signed a Stock Purchase Agreement on May
28, 1999. Under that agreement, the Company sold to Crescent 1,398,951 shares of
common stock for $598,050 and issued warrants to purchase 750,000 shares of
common stock at a price of $.6435 per share. Crescent exercised its warrants
during 2000. By July 31, 2001, Crescent had sold all of its shares of the
Company in the over-the- counter market or through negotiated transactions.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated, we believe each person
possesses sole voting and investment power with respect to all of the shares of
common stock owned by such person, subject to community property laws where
applicable. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of common stock subject to
options or warrants held by that person that are currently exercisable or
exercisable within 60 days are deemed outstanding. Such shares, however, are not
deemed outstanding for the purpose of computing the percentage ownership of any
other person.
Except as previously discussed, the selling shareholder has not held
any positions or offices or had material relationships with us or any of our
affiliates within the past three years. We may amend or supplement this
prospectus from time to time to update the disclosure.
LEGAL MATTERS
Certain legal matters with respect to the validity of the common stock
offered herebyshares being
registered have been passed upon for the Companycompany by Rieck and Crotty, P.C., 55
West Monroe Street, Suite 3390, Chicago, Illinois. The Rieck and Crotty, P.C. Profit
Sharing Plan owns 7,000 Shares of Common Stock.Illinois 60603.
35
EXPERTS
The audited consolidated financial statements as of and for the Companythree
years ended December 31, 2001, which are included in this Prospectusprospectus and appearingappear
in the registration statement have been audited by Arthur AndersenGrant Thornton LLP,
independent certified public accountants, as set forth in their report thereon
which appears elsewhere hereinin the prospectus and in the registration statement, and
is included in reliance upon the authority of such firm as experts in giving said reports.accounting
and auditing.
36
DAUPHIN TECHNOLOGY, INC.Dauphin Technology, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Unaudited Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS - MARCH 31, 2002 AND
DECEMBER 31, 2001 ............................................... F-2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED MARCH 31, 2002 AND 2001 ...................... F-3
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2001 AND THREE MONTHS
ENDED MARCH 31, 2002 ............................................ F-4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
MONTHS ENDED MARCH 31, 2002 AND 2001 ............................ F-5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ..................... F-6
Audited Consolidated Financial Statements
Report of Independent Certified Public Accountants ................... F-1
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 2001 AND 2000 .............. F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2001, 2000 AND
1999 ............................................................ F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS
ENDED DECEMBER 31, 1999, 2000 AND 2001 .......................... F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2001, 2000 AND
1999 ............................................................ F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ............................... F-7
F-1
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS--DECEMBERSHEETS
March 31, 1997 AND 1996 F-32002 and December 31, 2001
(Unaudited)
March 31, 2002 December 31, 2001
-------------- -----------------
CURRENT ASSETS:
Cash $ 236,383 $ 725,364
Accounts receivable-
Trade, net of allowance for bad debt of $50,621 at March 31,
2002 and December 31, 2001 36,650 67,201
Employee receivables 3,248 3,248
Inventory, net of reserve for obsolescence of $2,981,623 at March
31, 2002 and December 31, 2001 303,151 518,452
Prepaid expenses 56,759 37,883
------------- -------------
Total current assets 636,191 1,352,148
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $565,494 at March 31, 2002 and $475,899 at
December 31, 2001
2,050,147 1,824,935
ESCROW DEPOSIT
76,220 368,181
ASSETS NOT USED IN BUSINESS 75,017 75,017
INSTALLATION CONTRACTS, net of accumulated amortization
of $34,286 and $22,857 at March 31, 2002 and December 31,
2001, respectively 285,714 297,143
------------- -------------
Total assets $ 3,123,289 $ 3,917,424
============= =============
CURRENT LIABILITIES:
Accounts payable $ 588,421 $ 477,716
Accrued expenses 71,121 103,792
Short-term borrowings 100,000 -
Current portion of long-term debt 81,055 82,507
Customer Deposits 7,741 7,741
------------- -------------
Total current liabilities 848,338 671,756
LONG-TERM DEBT 37,630 43,580
CONVERTIBLE DEBENTURES 1,383,666 1,153,197
MORTGAGE NOTE PAYABLE 250,000 -
------------- -------------
Total liabilities 2,519,634 1,868,533
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 10,000,000 shares authorized
but unissued - -
Common stock, $0.001 par value, 100,000,000 shares authorized;
65,050,646 and 64,059,813 issued and outstanding at March 31,
2002 and at December 31, 2001, respectively 65,051 64,061
Warrants 3,989,394 4,227,499
Paid-in capital 58,075,353 57,351,406
Accumulated deficit (61,526,143) (59,594,075)
------------- -------------
Total shareholders' equity 603,655 2,048,891
------------- -------------
Total liabilities and shareholders' equity $ 3,123,289 $ 3,917,424
============= =============
F-2
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE
YEARS ENDED DECEMBERThree months ended March 31, 1997, 1996 AND 1995 F-42002 and 2001
(Unaudited)
Three Months
Ended March 31,
---------------
2002 2001
---- ----
NET SALES $ 93,094 $ 4,566
DESIGN SERVICE REVENUE 59,375 440,588
------------ ------------
TOTAL REVENUE 152,469 445,154
COST OF SALES 55,916 2,222
COST OF SERVICES 448,493 326,363
------------ ------------
Gross (loss) profit (351,940) 116,569
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,110,915 475,984
RESEARCH AND DEVELOPMENT EXPENSE 240,533 462,522
AMORTIZATION OF GOODWILL - 275,000
------------ ------------
Loss from operations (1,703,388) (1,096,937)
INTEREST EXPENSE 233,015 6,885
INTEREST INCOME 4,335 88,660
------------ ------------
Loss before income taxes (1,932,068) (1,015,162)
INCOME TAXES - -
------------ ------------
NET LOSS $ (1,932,068) $ (1,015,162)
============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.03) $ (0.02)
============ ============
Weighted average number of shares of common stock outstanding 64,510,424 61,798,069
F-3
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF SHAREHOLDERS'
EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBERYear ended December 31, 1997, 1996 AND 1995 F-52001 and three months
ended March 31, 2002
(Unaudited)
Common Stock Paid-in
------------
Shares Amount Capital Warrants
------ ------ ------- --------
BALANCE, December 31, 2000 61,652,069 $ 61,653 $ 53,479,116 $ 3,321,810
Issuance of common stock in connection with:
Stock purchase agreement 258,968 259 280,640 19,101
Beneficial conversion feature and
warrants - - 914,279 684,600
Stock Options exercised 35,600 36 28,528 -
Warrants exercised 285,000 285 242,025 (71,236)
Acquisition of business 766,058 766 1,125,339 -
Personal guarantee 1,032,118 1,032 1,240,709 -
Vendor payments 30,000 30 40,770 273,224
Net loss - - - -
----------- --------- ------------ -----------
BALANCE, December 31, 2001 64,059,813 64,061 57,351,406 4,227,499
Issuance of common stock in connection with:
Stock Options exercised 57,500 57 49,557 -
Warrants exercised 933,333 933 674,390 (265,323)
Consulting fees - - - 27,218
Net loss - - - -
----------- --------- ------------ ------------
BALANCE, March 31, 2002 65,050,646 $ 65,051 $ 58,075,353 $ 3,989,394
=========== ========= ============ ============
Treasury Stock Accumulated
-------- -----
Shares Amount Deficit Total
------ ------ ------- -----
BALANCE, December 31, 2000 - $ - $(46,341,715) $ 10,520,864
Issuance of common stock in connection with:
Stock purchase agreement - - - 300,000
Beneficial conversion feature and
warrants - - - 1,598,879
Stock Options exercised - - - 28,564
Warrants exercised - - - 171,074
Acquisition of business - - - 1,126,105
Personal guarantee - - - 1,241,741
Vendor payments - - - 314,024
Net loss - - (13,252,360) (13,252,360)
----------- --------- ------------ ------------
BALANCE, December 31, 2001 - - (59,594,075) 2,048,891
Issuance of common stock in connection with:
Stock Options exercised - - - 49,614
Warrants exercised - - - 410,000
Consulting fees - - - 27,218
Net loss - - (1,932,068) (1,932,068)
----------- --------- ------------ ------------
BALANCE, March 31, 2002 - $ - $(61,526,143) $ 603,655
=========== ========= ============ ============
F-4
Dauphin Technology, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBERThree months ended March 31, 1997, 1996 AND 1995 F-62002 and 2001
(Unaudited)
-------------------------------------------------------------------------------
2002 2001
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES -
Net loss $(1,932,068) $(1,015,162)
Non-cash items included in net loss:
Depreciation and amortization 101,024 98,645
Amortization of goodwill - 275,000
Interest expense on convertible note 230,469 -
Warrants issued in lieu of consulting fees 27,218 -
Decrease (increase) in accounts receivable - trade 30,551 (23,348)
Decrease in accounts receivable from employees - 3,342
Decrease (increase) in inventory 215,301 (23,311)
Increase in prepaid expenses (18,876) (100,920)
Decrease in escrow deposits 291,961 46,336
Increase (decrease) in accounts payable 110,705 (65,084)
Decrease in accrued expenses (32,671) (5,345)
Increase in customer deposits - 344
----------- -----------
Net cash used in operating activities (976,386) (809,503)
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchase of equipment (314,807) (26,613)
----------- -----------
Net cash used in investing activities (314,807) (26,613)
CASH FLOWS FROM FINANCING ACTIVITIES -
Proceeds from issuance of shares 49,614 104,300
Proceeds from issuance of warrants 410,000 -
Repayment of long-term leases and other obligations (7,402) (21,842)
Increase in mortgage note payables 250,000 -
Increase in short-term borrowing 100,000 -
----------- -----------
Net cash provided by financing activities 802,212 82,458
----------- -----------
Net (decrease) increase in cash (488,981) (753,658)
CASH BEGINNING OF PERIOD 725,364 2,683,480
----------- -----------
CASH END OF PERIOD $ 236,383 $ 1,929,822
=========== ===========
Cash Paid During The Period For -
Interest $ 2,546 $ 6,885
F-5
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Dauphin Technology, Inc. ("Dauphin" or the "Company") and its Subsidiaries
design and market mobile hand-held, pen-based computers, broadband set-top
boxes; provide interactive cable systems to the extended stay hospitality
industry; and perform design services, specializing in hardware and software
development, out of its three locations in northern Illinois, one in central
Florida and its branch office in Piraeus, Greece. The Company, an Illinois
corporation, was formed on June 6, 1988 and became a public entity in 1991.
Basis of Presentation
The consolidated financial statements include the accounts of Dauphin and its
wholly owned subsidiaries, R.M. Schultz & Associates, Inc. ("RMS"), Advanced
Digital Designs, Inc ("ADD") and Suncoast Automation, Inc. ("Suncoast"). All
significant intercompany transactions and balances have been eliminated in
consolidation.
2. SUMMARY OF MAJOR ACCOUNTING POLICIES
Earnings (Loss) Per Common Share
Basic earnings per common share are calculated on income available to common
stockholders divided by the weighted-average number of shares outstanding during
the period, which were 64,510,424 for the three-month period March 31, 2002 and
61,798,069 for the three-month period March 31, 2001. Diluted loss per common
share is adjusted for the assumed conversion exercise of stock options and
warrants unless such adjustment would have an anti-dilutive effect.
Approximately 12.5 million additional shares would be outstanding if all
warrants and all stock options were exercised as of March 31, 2002.
Unaudited Financial Statements
The accompanying statements are unaudited, but have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and in accordance with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of results have been included. The interim
financial statements contained herein do not include all of the footnotes and
other information required by accounting principles generally accepted in the
United States of America for complete financial statements as provided at
year-end. For further information, refer to the consolidated financial
statements and footnotes thereto included in the registrant's annual report on
Form 10-K for the year ended December 31, 2001.
The reader is reminded that the results of operations for the interim period are
not necessarily indicative of the results for the complete year.
Use of Estimates
The presentation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions. These estimates
and assumptions affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-6
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
3. RISKS AND UNCERTAINTIES
The Company has incurred a net operating loss in each year since its founding
and as of March 31, 2002 has an accumulated deficit of $61,526,143. The Company
expects to incur operating losses over the near term. The Company's ability to
achieve profitability will depend on many factors including the Company's
ability to design and develop and market commercially acceptable products
including its set-top box. There can be no assurance that the Company will ever
achieve a profitable level of operations or if profitability is achieved, that
it can be sustained.
4. BUSINESS SEGMENTS
The Company has three reportable segments: Dauphin Technology, Inc. and RMS
(Dauphin), Advanced Digital Designs, Inc. (ADD) and Suncoast Automation, Inc.
(Suncoast). Dauphin is involved in design, manufacturing and distribution of
hand-held pen-based computer systems and accessories and smartbox set-top boxes.
ADD performs design services, process methodology consulting and intellectual
property development.
March 31, 2002 March 31, 2001
---------------- ----------------
Revenue
-------
Dauphin $ 15,132 $ 4,566
ADD 268,750 638,275
Suncoast 77,962 -
Inter-company elimination (209,375) (197,687)
------------ ------------
Total $ 152,469 $ 445,154
============ ============
Operating (Loss)
Dauphin $ (1,117,988) $ (1,037,747)
ADD (288,667) (59,190)
Suncoast (296,733) -
Inter-company elimination - -
----------- ------------
Total $ (1,703,388) $ (1,096,937)
============ ============
March 31, 2002 December 31, 2001
---------------- -----------------
Assets
------
Dauphin $ 18,039,736 $ 17,461,145
ADD 2,678,197 2,699,250
Suncoast 1,747,311 1,702,791
------------
Inter-company elimination (19,341,955) (17,945,762)
------------ ------------
Total $ 3,123,289 $ 3,917,424
============ ============
5. COMMITMENTS AND CONTINGENCIES
The Company is an operating entity and in the normal course of business, from
time to time, may be involved in litigation. In management's opinion, any
current or pending litigation is not material to the overall financial position
of the Company.
Dauphin Technology, Inc.
F-7
Dauphin Technology, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
6. CONVERTIBLE DEBT AND WARRANTS
-----------------------------
In connection with a Securities Purchase Agreement entered into with Crescent
International Ltd., an institutional investor, on September 28, 2001, a
Convertible Note was funded on October 2, 2001 and is due September 28, 2004.
The Company shall not be required to pay interest on the Convertible Note unless
the Company fails to deliver shares upon conversion. In such event, the Note
will bear an interest rate of 8.0% per annum, payable in quarterly installments.
The Company has recorded a beneficial conversion feature on the Convertible Note
and Warrants based on the fair value of the common stock of $0.99 per share as
of the date of commitment. The Warrants with an exercise price of $1.3064 per
share, are valued using the Black-Scholes valuation method, and are recorded at
$684,600. The beneficial conversion feature is calculated to be $914,279 and has
been recorded as Additional Paid in Capital and a discount to the Convertible
Note. The beneficial conversion feature is being amortized over three years, the
life of the Note. For the three month period ended March 31, 2002, the Company
recognized $230,469 as interest expense on the amortization of the beneficial
conversion feature. At conversion, the Company may record an additional
beneficial conversion based on the market price of the stock at the conversion
date.
7. MORTGAGE NOTE PAYABLE
---------------------
On March 28, 2002, the Company entered into a one-year mortgage note payable
with a current shareholder, Clifford F. Klose and Marjorie J. Klose Trust. The
interest rate is Prime plus 7.25%. The current interest rate is 12% per annum.
Interest is payable on a monthly basis. The Company's building in Schaumburg,
Illinois serves as collateral for the mortgage.
8. EQUITY TRANSACTIONS
-------------------
2002 Events
During the first quarter of 2002, the Company received proceeds in the amount of
$410,000 for the exercise of 933,333 warrants. Additionally, employees exercised
57,500 stock options at prices ranging from $0.50 to $0.89 per share.
In March 2002, the Company re-priced approximately 1,023,000 warrants it had
previously issued to outside consultants. The warrants were originally issued
with an exercise price ranging from $2.00 to $5.00, and were re-priced with an
exercise price of $0.60 per share. The re-pricing created a charge to earnings
of approximately $27,218, which was calculated using the Black-Scholes pricing
model assuming 0% dividend yield, risk free interest rate of 5%, volatility
factor of 443% and an expected remaining life of 10 months.
F-8
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders of
Dauphin Technology, Inc.: and Subsidiaries:
We have audited the accompanying consolidated balance sheets of DAUPHIN
TECHNOLOGY, INC. (an Illinois corporation) and Subsidiary,Subsidiaries, as of December 31,
19972001 and 1996,2000, and the related consolidated statements of operations,
consolidated shareholders' equity (deficit) and consolidated cash flows for each of the three years in the period ended December 31, 1997.2001.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
auditing
standards.in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Dauphin
Technology, Inc. and its Subsidiaries as of December 31, 19972001 and 1996,2000 and the
consolidated results of itstheir operations and itstheir cash flows for each of the three
years in the period ended December 31, 1997,2001, in conformity with accounting principles
generally accepted accounting principles.
ARTHUR ANDERSENin the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
incurred a net loss of $13,252,360 during the year ended December 31, 2001, and,
as of that date, the Company's accumulated deficit is $59,594,075. In addition,
the Company has consistently used, rather than provided, cash in its operations.
These factors, among others, as discussed in Note 2 to the financial statements,
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As disclosed in Note 20, the accompanying consolidated financial statements for
the year ended December 31, 2000 have been restated.
GRANT THORNTON LLP
Chicago, Illinois
February 20, 1998April 9, 2002
F-9
DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARYDauphin Technology, Inc.
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1997 AND 1996
1997 1996
CURRENT ASSETS:
Cash $ 3,620,880 $ 388,600
Restricted cash - 232,000
Accounts receivable-
Trade, net of allowance for bad debt
of $7,500 and $0 in 1997 and 1996 462,821 2,010
Other 20,195 -
Inventory, net of reserve for
obsolescence of $2,143,934 and
$185,783 in 1997 and 1996 1,531,464 2,652,461
Prepaid expenses 39,201 12,251
------------ ------------
Total current assets 5,674,561 3,287,322
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $176,318
and $103,074 atSHEETS
December 31, 19972001 and 1996, respectively 739,556 115,538
GOODWILL, net of amortization of
$20,427 for 1997 855,019 -
------------ ------------
Total assets $ 7,269,136 $ 3,402,8602000
2001 2000
---- ----
RESTATED
CURRENT ASSETS:
Cash $ 725,364 $ 2,683,480
Accounts receivable-
Trade, net of allowance for bad debt of $50,621 at December 31,
2001 and 2000 67,201 321,377
Employee receivables 3,248 21,590
Inventory, net of reserves for obsolescence of $2,981,623 and
$2,491,216 at December 31, 2001 and 2000 518,452 505,749
Prepaid expenses 37,883 20,794
------------ ------------
Total current assets 1,352,148 3,552,990
INVESTMENT IN RELATED PARTY - 290,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$475,899 and $1,127,040 at December 31, 2001 and 2000 1,824,935 1,477,787
ESCROW DEPOSIT 368,181 752,500
ASSETS NOT USED IN BUSINESS 75,017 -
INSTALLATION CONTRACTS, net of accumulated amortization of
$22,857 at December 31, 2001 297,143 -
GOODWILL, net of accumulated amortization of $412,500 at
December 31, 2000 - 5,087,500
------------ ------------
Total assets $ 3,917,424 $ 11,160,777
============ ============
CURRENT LIABILITIES
Accounts payable $ 477,716 $ 290,474
Accrued expenses 103,792 80,433
Current portion of long-term debt 82,507 113,629
Customer deposits 7,741 53,244
------------ ------------
Total current liabilities 671,756 537,780
LONG-TERM DEBT 43,580 102,133
CONVERTIBLE DEBENTURES 1,153,197 -
------------ ------------
Total liabilities 1,868,533 639,913
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 10,000,000 shares authorized
but unissued - -
Common stock, $0.001 par value, 100,000,000 shares authorized;
64,059,813 shares issued and outstanding at December 31, 2001
and 61,652,069 shares issued and outstanding at December 31, 2000 64,061 61,653
Warrants to purchase 9,198,744 and 8,822,572 shares at December
31, 2001 and 2000 4,227,499 3,321,810
Paid-in capital 57,351,406 53,479,116
Accumulated deficit (59,594,075) (46,341,715)
------------ ------------
Total shareholders' equity 2,048,891 10,520,864
------------ ------------
Total liabilities and shareholders' equity $ 3,917,424 $ 11,160,777
============ ============
CURRENT LIABILITIES:
Accounts payable $ 790,784 $ 204,450
Accrued expenses 285,837 62,314
Current portion of long-term debt 83,782 -
Short-term borrowings 87,394 -
------------ ------------
Total current liabilities 1,247,797 266,764
LONG-TERM DEBT 345,744 43,196
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 10,000,000
shares authorized but unissued - -
Common stock, $0.001 par value, 100,000,000
shares authorized; 37,035,673 shares issued
and 36,305,096 shares outstanding at December
31, 1997 and 31,706,397 shares issued and
29,547,111 outstanding at December 31, 1996 37,036 31,706
Treasury stock, 730,577 and 2,159,286 shares
at December 31, 1997 and 1996 (255,702) (1,187,607)
Paid-in capital 29,283,136 23,649,659
Accumulated deficit (23,388,875) (19,400,858)
------------- -------------
Total shareholders' equity 5,675,595 3,092,900
------------- -------------
Total liabilities and
shareholders' equity $ 7,269,136 $ 3,402,860
============= =============
The accompanying notes are an integral part of these balance sheets.
F-10
DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARYDauphin Technology, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBERFor the years ended December 31, 1997, 1996 AND 19952001, 2000 and 1999
1997 1996 1995
2001 2000 1999
---- ---- ----
REVENUESRESTATED
NET SALES $ 2,730,0351,274,045 $ 93,94763,913 $ 183,0832,279,058
DESIGN SERVICE REVENUE 1,346,162 795,924 -
-------------- -------------- ---------------
TOTAL REVENUE 2,620,207 859,837 2,279,058
COST OF SALES 4,345,315 279,232 93,852
----------- ------------ -----------1,608,380 2,375,948 4,833,601
COST OF SERVICES 1,136,619 499,679 -
-------------- -------------- ---------------
Gross profit (loss) (1,615,280) (185,285) 89,231loss (124,792) (2,015,790) (2,554,543)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
1,484,979 1,007,309 681,3354,742,028 3,630,199 3,405,620
RESEARCH AND DEVELOPMENT EXPENSE 827,843 76,711 22,388
----------- ----------- -----------2,434,006 1,472,093 510,287
AMORTIZATION OF GOODWILL 1,100,000 412,500 -
ASSET IMPAIRMENT AND OTHER LOSSES 4,277,500 - 767,475
WRITE OFF ASSETS NO LONGER USED IN
BUSINESS 525,691 - -
-------------- -------------- ---------------
Loss from operations (3,928,102) (1,269,305) (614,492)(13,204,017) (7,530,582) (7,237,925)
INTEREST EXPENSE 75,988 2,310 -274,407 67,753 2,099,179
INTEREST INCOME 16,073 9,997 -
----------- ----------- -----------
Loss before reorganizational items,
income taxes and extraordinary item (3,988,017) (1,261,618) (614,492)
REORGANIZATIONAL ITEMS:
Professional fees - 135,086 180,320
----------- ----------- -----------226,064 83,356 30,800
-------------- -------------- ---------------
Loss before income taxes and extraordinary item (3,988,017) (1,396,704) (794,812)(13,252,360) (7,514,979) (9,306,304)
INCOME TAXES - - -
----------- ----------- -----------
Loss before extraordinary item (3,988,017) (1,396,704) (794,812)
----------- ----------- -----------
EXTRAORDINARY ITEM, forgiveness of debt
net of income taxes of $0 - 38,065,373 -
----------- ----------- ------------------------- -------------- ---------------
Net income (loss)loss $ (3,988,017)(13,252,360) $ 36,668,669(7,514,979) $ (794,812)
=========== =========== ===========
BASIC and DILUTED EARNINGS (LOSS)(9,306,304)
============== ============== ===============
LOSS PER SHARE:
Before extraordinary itemBasic $ (0.21) $ (0.13) $ (0.06)(0.20)
================ ============== ===============
Diluted $ (0.06)
Extraordinary item - 1.58 -
----------- ----------- -----------
Net income (loss) per share(0.21) $ (0.13) $ 1.52 $ (0.06)
=========== =========== ===========(0.20)
================ ============== ===============
Weighted average number of shares of common
stock outstanding
30,734,045 24,076,301 14,408,354Basic 63,147,476 58,711,286 46,200,408
Diluted 63,147,476 58,711,286 46,200,408
The accompanying notes are an integral part of these statements.
F-11
DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARYDauphin Technology, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DEFICIT)
FOR THE YEARS ENDED DECEMBERFor the years ended December 31, 1997, 1996 AND 19952001, 2000 and 1999
Common Stock Paid-in
Treasury Stock Accumulated
Shares Amount Capital Shares Amount Deficit TotalWarrants
------ ------ ------- --------
BALANCE, December 31, 1994 14,408,354January 1, 1999 40,000,000 $ 14,40840,000 $ 5,232,597 -32,343,785 $ - $(55,274,715) $ (50,027,710)
Reverse accumulated compensatory
effect of stock options granted - - (87,665) - - - (87,665)
Net loss - - - - - (794,812) (794,812)
------------ --------- ------------ ----------- ---------- ----------- ------------
BALANCE, December 31, 1995 14,408,354 14,408 5,144,932 - - (56,069,527) (50,910,187)55,181
Issuance of common stock in connection with:
Bankruptcy conversion 11,650,000 11,650 13,036,350 - - - 13,048,000
PurchaseConversions of inventory 2,600,000 2,600 2,909,400 - - - 2,912,000debt 4,985,358 4,985 3,842,235 287,700
Private placement 1,948,043 1,948 1,790,077 - - - 1,792,0256,003,529 6,004 1,481,167 895,208
Settlement of note payable 1,100,000 1,100 768,900Trade Payables 656,322 656 395,243 -
Stock bonuses paid 26,373 26 26,890 -
- 770,000
Purchase of treasury stock - - - (2,159,286) (1,187,607) - (1,187,607)
Net incomeloss - - - -
- 36,668,669 36,668,669
---------------------- --------- ------------ ----------- ---------- ----------- -------------------------
BALANCE, December 31, 1996 31,706,397 31,706 23,649,659 (2,159,286) (1,187,607) (19,400,858) 3,092,9001999 51,671,582 $ 51,671 $ 38,089,320 $ 1,238,089
Issuance of common stock in connection with:
Private placement, 4,872,520 4,873 4,582,294restated 4,654,613 4,656 6,877,639 419,556
Stock purchase agreement 2,136,616 2,137 5,854,991 1,142,872
Warrant exercised 1,999,602 1,999 1,234,715 (620,641)
Consulting fees 500,000 500 312,000 1,103,669
Employee stock compensation - - 70,622 -
4,587,167
Commissions to broker/dealer 131,756 132 (132)Settlement of trade payables 480,000 480 299,520 -
Stock options exercised 2,000 2 998 -
Vendor payments 207,656 208 739,311 38,265
Net loss, restated - - - -
Purchase---------- --------- ------------ ------------
BALANCE, December 31, 2000, restated 61,652,069 $ 61,653 $ 53,479,116 $ 3,321,810
Issuance of a subsidiary 220,000 220 232,980common stock in connection with:
Stock purchase agreement 258,968 259 280,640 19,101
Beneficial conversion feature and
warrants - - 914,279 684,600
Stock Options exercised 35,600 36 28,528 -
233,200
Escrow shares 105,000 105Warrants exercised 285,000 285 242,025 (71,236)
Acquisition of business 766,058 766 1,125,339 -
Personal guarantee 1,032,118 1,032 1,240,709 -
Vendor payments 30,000 30 40,770 273,224
Net loss - - - -
105
Purchase---------- --------- ------------ ------------
BALANCE, December 31, 2001 64,059,813 $ 64,061 $ 57,351,406 $ 4,227,499
========== ========= ============ ============
Treasury Stock Accumulated
Shares Amount Deficit Total
------ ------ ------- -----
BALANCE, January 1, 1999 (138,182) $ (33,306) $(29,520,432) $ 2,885,228
Issuance of treasurycommon stock in connection with:
Conversions of debt 101,673 24,402 - 4,159,322
Private placement 14,963 3,591 - 2,385,970
Settlement of Trade Payables 1,546 371 - 396,270
Stock bonuses paid 20,000 4,942 - 31,858
Net loss - - (9,306,304) (9,306,304)
---------- --------- ------------ ------------
BALANCE, December 31, 1999 - $ - $(38,826,736) $ 552,344
Issuance of common stock in connection with:
Private placement, restated - - - (891,626) (341,369) - (341,369)
Issuance of treasury stock - - 812,084 2,307,835 1,266,400 - 2,078,4847,301,851
Stock bonuses paid - - 6,250 12,500 6,875 - 13,125
Net incomepurchase agreement - - - 7,000,000
Warrant exercised - - (3,988,017) (3,988,017)
------------- 616,073
Consulting fees - - - 1,416,169
Employee stock compensation - - - 70,622
Settlement of trade payables - - - 300,000
Stock options exercised - - - 1,000
Vendor payments - - -
777,784
Net loss, restated - - (7,514,979) (7,514,979)
---------- --------- ------------ ----------- ---------- ----------- -------------------------
BALANCE, December 31, 1997 37,035,6732000, restated - $ 37,036- $(46,341,715) $ 29,283,136 (730,577)10,520,864
Issuance of common stock in connection with:
Stock purchase agreement - - - 300,000
Beneficial conversion feature and
warrants - - - 1,598,879
Stock Options exercised - - - 28,564
Warrants exercised - - - 171,074
Acquisition of business - - - 1,126,105
Personal guarantee - - - 1,241,741
Vendor payments - - - 314,024
Net loss - - (13,252,360) (13,252,360)
---------- --------- ------------ ------------
BALANCE, December 31, 2001 - $ (255,702) $(23,388,875)- $(59,594,075) $ 5,675,595
============2,048,891
========== ========= ============ =========== ========== ============ ============
The accompanying notes are an integral part of these statements.
F-12
DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARYDauphin Technology, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBERFor the years ended December 31, 1997, 1996 AND 19952001, 2000 and 1999
1997 1996 1995
2001 2000 1999
---- ---- ----
RESTATED
--------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)loss $(13,252,360) $ (3,988,017) $ 36,668,669 $ (794,812)(7,514,979) $(9,306,304)
Non-cash items included in net income (loss)-
Loss on disposition of property and equipment - 1,850 41,053loss
Depreciation and amortization 93,671 33,459 39,698
Compensatory effect of stock options earned1,630,454 827,348 1,101,616
Inventory reserve 490,407 545,920 1,793,296
Bad debt reserve - (377,978) 417,361
Asset impairment losses 4,277,500 - -
(87,665)
Extraordinary itemWrite off assets not used in business 525,691 - (38,065,373)-
Interest expense on convertible debt 252,076 - 2,062,451
Common stock issued for personal guarantee 1,241,741 - -
Warrants issued in lieu of consulting fees 266,998 680,005 -
Common stock issued to vendors 40,800 1,052,019 -
Employee stock compensation - 70,622 -
Settlement of trade payables - (436,478) -
Stock bonus 13,125 - - 31,858
Changes in-
Accounts receivable
- trade 129,519 3,781 (128,381)268,845 181,445 147,508
- other (20,195) 167,266employee 18,342 (21,472) 45,869
Inventory (390,056) 470,217 (361,495)
Prepaid expenses 7,237 17,985 7,817
Escrow deposits 384,319 (752,500) -
Inventory 1,893,655 22,807 22,644
Prepaid software and other current assets (14,396) (12,251) -
Bank overdraft - - (1,299)
Accounts payable accrued47,128 (1,176,470) (208,909)
Accrued expenses and
claims payable (554,276) 14,536 252,228
------------- ------------- -------------23,359 53,714 (188,586)
Customer deposits (45,503) 53,244 -
------------ ------------ -----------
Net cash (used for)used in operating activities (2,446,914) (1,165,256) (656,534)(4,213,022) (6,327,358) (4,457,518)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment and furniture (201,965) (81,210) (10,809)(661,283) (2,195) (25,680)
Acquisition of business - (6,025,000) -
Investment - - 10,000
------------ ------------ -----------
Net cash used in investing activities (661,283) (6,027,195) (15,680)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received in acquisition 31,162 - -
Short-term borrowing and DIP financing (706,390) 375,000 759,947
Purchase of treasury stock (341,369) (1,187,607) -
Issuance of debt - 795,044 -
Proceeds from issuance of common stock 6,665,756 1,792,025shares 300,000 14,201,671 2,385,970
Proceeds from exercise of warrants and options 205,864 1,179,182 -
------------- -------------Issuance of convertible debentures and warrants net
of financing 2,500,000 - 1,776,614
(Decrease) increase in short-term borrowing - (286,000) 286,000
Repayment of long-term leases and other (89,675) (87,907) -
------------ ------------ -----------
obligations
Net cash provided by financing activities 5,649,159 1,774,462 759,947
------------- -------------2,916,189 15,006,946 4,448,584
------------ ------------ -----------
Net changeincrease (decrease) in cash 3,000,280 527,996 92,604(1,958,116) 2,652,393 (24,614)
CASH, beginning of year 620,600 92,604 -
------------- -------------2,683,480 31,087 55,701
------------ ------------ -----------
CASH, end of year $ 3,620,880725,364 $ 620,6002,683,480 $ 92,604
============= =============31,087
============ ============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paidPaid $ 75,98822,331 $ 2,31036,728 $ -
Reorganization item - 135,086 1,80,320
============= ============ ===========36,728
NONCASH TRANSACTIONS:
Common stock issued in connection with
-
Bankruptcy settlementSettlement of customer deposits and payables $ - $ 13,048,000300,000 $ -
Purchase396,270
Conversion of inventory - 2,912,000 -
Settlement of notes payable - 770,000 -
Acquisition of R.M. Schultz & Associates -
Assumption of liabilities 2,197,058debentures - - Issuance of stock 233,200 - -
Capital equipment leased 347,189 - -
============ =========== ===========4,159,322
The accompanying notes are an integral part of these statements
F-13
DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARYDauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBERDecember 31, 1997, 1996 AND 19952001, 2000 and 1999
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:
Description of Business
Dauphin Technology, Inc. was founded to("Dauphin" or the "Company") and its Subsidiaries
design manufacture and market mobile computinghand-held, pen-based computers, broadband set-top
boxes; provide private, interactive cable systems including laptop, notebook, hand-heldto the extended stay
hospitality industry; and pen-
based computers, componentsperform design services, specializing in hardware and
accessories. Historically,software development, out of three locations in northern Illinois, one in
central Florida and its branch office in Piraeus, Greece. Through one of its
subsidiaries, the Company marketed directly andits contract manufacturing services through
other distribution channels to both the
commercial and government market segments.
OnJuly 1999. The Company, an Illinois corporation, was formed on June 6, 1997, Dauphin acquired all issued1988 and
outstanding shares of
R.M. Schultz & Associates, Inc., ("RMS") an electronics contract
manufacturing firm locatedbecame a public entity in McHenry, Illinois. RMS is involved in
electronics design, development and production of products for
manufacturers located in Illinois and Wisconsin (see Note 3).1991.
Basis of Presentation
The consolidated financial statements include the accounts of Dauphin Technology, Inc. and its
wholly-owned subsidiary, RMS (the "Company"wholly owned subsidiaries, R.M. Schultz & Associates, Inc. ("RMS"), Advanced
Digital Designs, Inc. ("ADD") and Suncoast Automation, Inc. ("Suncoast"). All
significant intercompanyinter-company transactions and accountsbalances have been eliminated in
consolidation.
On January 3, 1995,2. REALIZATION OF ASSETS:
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the company as a going concern. However, the company
has sustained substantial losses from operations in recent years, and such
losses have continued through the unaudited quarter ended March 31, 2002.
Revenues from the Company's design services have declined. In addition, the
company has used, rather than provided, cash in its operations.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the company, which in turn is
dependent upon the company's ability to meet its financing requirements on a
continuing basis, to maintain present financing, and to succeed in its future
operations. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the company be
unable to continue in existence.
Management has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company filed a petition for relief under
Chapter 11with the
ability to continue in existence: The Company has concentrated its efforts on
marketing its set-top boxes, halted all further development of the Federal Bankruptcy Code. During 1995next
generation Orasis and are exploring alternative mobile hand-held computer
products through original equipment manufacturers. In January 2002 the
first six
monthsmanagement of 1996, the Company operated under Chapter 11. On May 9, 1996,began terminating employees who were not a critical
part of the Company's Third Amended Plan of Reorganization was approved bymarketing efforts. The facilities in McHenry, which housed the RMS
operations, has been closed, the majority of creditorsthe personnel have been terminated
and shareholdersthe remaining inventory and confirmed byequipment will be auctioned in the Court. On
July 23, 1996,second
quarter of 2002.
F-14
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
3. RISK AND UNCERTAINTIES:
Absence of Operating Profit
The Company has incurred a net operating loss in each year since it's founding
and as of December 31, 2001 has an accumulated deficit of $59,594,075. The
Company expects to incur operating losses over the Court dischargednear term. The Company's
ability to achieve profitability will depend on many factors including the
Company's ability to market commercially acceptable products including its
set-top box. There can be no assurance that the Company aswill ever achieve a
Debtor-in-
Possessionprofitable level of operations or if profitability is achieved, that it can be
sustained.
Early Stage of Development of the Company's Products
From June of 1997 through June of 1999, the Company was principally engaged in
research and development activities involving the bankruptcy case was closed.
2.hand-held computer. Since
then, the Company has been working on new technologies, in particular the design
and development of the set-top boxes. In 2001, the Company also began developing
a new version of its hand-held computer. The Company's products have been sold
in limited quantities and there can be no assurance that a significant market
will develop for such products in the future. Therefore, the Company's inability
to develop and market its products on a timely basis may have a material adverse
effect on the Company's financial results.
4. SUMMARY OF MAJOR ACCOUNTING POLICIES:
UseCash and Cash Equivalents
Cash and cash equivalents include all cash and liquid investments that mature
three months or less from when they are purchased. The carrying amount
approximates the fair value due to short maturity of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Revenue Recognition
The Company recognizes revenue on the sale of computers, accessories and
fulfillment of certain manufacturing contracts. Revenues from sales of
productsthese investments.
Inventories
Inventories are recognized upon delivery. Revenue from the fulfillment of
manufacturing contracts is recognized upon shipment of the product.
Inventory
Inventory is stated at the lower of cost or market. Cost is determined(determined on thea first-in, first-out
(FIFO) basis. Inventory consistsbasis) or market and primarily consist of the
following at December 31:
1997 1996
Finished goods $ 22,343 $ -
Work in process 191,872 -
Semi-finished units 168,420 144,327
Raw materials 651,990 -
Computer accessories, componentspurchased parts and supplies 2,640,773 2,693,917
------------ ------------
3,675,398 2,838,244
Less- Reserve for obsolescence (2,143,934) (185,783)
------------ ------------
$ 1,531,464 $ 2,652,461
============ ============
In the fourth quarter of 1997, in conjunction with the final stages of
development of Orasis( and its introduction at the fall 1997 COMDEX
show, some of the inventory previously acquired for the production of
DTR product line became obsolete. Originally the Company intended to
use all parts of the DTR line in the design and production of Orasis(.
The Company wrote down approximately $1.7 million of raw materials
inventory comprised primarily of DTR line batteries, power cords,
digitizer panels and LCD screens. These items have been redesigned or
upgraded for Orasis(. Also, with the introduction of Orasis(, the semi-
finished DTR units inventory was written down to net realizable value.assemblies.
Property and Equipment
Property and equipment are recordedstated at cost. Depreciation is providedbeing computed using
the straight-line methods over the estimated useful lives (principally three to
seven years for machinery and equipment and twenty-five years for building) and
leasehold improvements over the lesser of the relatedlease term or their useful life.
Goodwill and long-lived assets
which range between three and sevenGoodwill arising from business acquisitions is amortized on a straight-line
basis ranging from five years to ten years. The estimated livesGoodwill associated with the
acquisition of certain leasehold improvementsADD was being amortized on a straight-line basis over 5 years.
Goodwill associated with the acquisition of RMS was being amortized on a
straight-line basis over 10 years. Installation contracts acquired in the
acquisition of Suncoast are being amortized on a straight-line basis over the remaining
term of the facilities leased. Fixedcontract, typically seven years. Long-lived assets, consistincluding
goodwill and other intangible assets, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impairment loss would be recognized when the carrying
amount of an asset exceeds the estimated undiscounted future cash flows expected
to result from the use of the following:
1997 1996
Furnitureasset and fixtures $ 40,950 $ 30,776
Office equipment 174,659 169,015
Manufacturing and warehouse equipment 427,791 6,111
Leasehold improvements 260,201 12,710
Automobile 12,273 -
------------- -------------
915,874 218,612
Less - Accumulated depreciation (176,318) (103,074)
------------- -------------
$ 739,556 $ 115,538
============= =============
Research and Development
Costs incurred in connection with research and development are expensed
as incurred. All salaries paid to employees associated with the
research and development are included as partits eventual disposition. The amount of
the expense.
Earningsimpairment loss to be recorded is calculated by the excess of the asset's
carrying value over its fair value. Fair value is
F-15
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
4. SUMMARY OF MAJOR ACCOUNTING POLICIES - Continued
Goodwill and long-lived assets-Continued
determined using a discounted cash flow analysis. The Company recorded
$1,100,000 and $412,500 of amortization expense during 2001 and 2000,
respectively. At the end of the year, the Company recorded an impairment loss of
$3,987,500 on goodwill and an impairment loss of $290,000 on its investment in
non-marketable securities (See Notes 6 and 13).
Income Taxes
Deferred tax liabilities and assets are recognized for the expected future tax
consequences of events that have been included in the financial statements and
tax returns. Deferred tax liabilities and assets are determined based on the
difference between the financial statement basis and tax basis of assets and
liabilities (excluding non-deductible goodwill) and using enacted tax rates in
effect for the years in which the differences are expected to become recoverable
or payable.
Revenue Recognition
The Company recognizes revenue upon shipment of mobile computers, computer
accessories, set-top boxes and assembled products. Revenue from design services,
consulting and intellectual property development is recognized in the month the
services are performed.
(Loss) Per Common Share
EarningsBasic loss per common share areis calculated under guidelines of FASB No. 128
"Earnings per Share" wherein earnings per share are presentedby dividing net loss for basic
and diluted shares on income from operations and net income. Basic
earnings per share are calculated on income available to common
stockholders dividedthe year by
the weighted-average number of shares outstanding during the period, which were
30,734,045, 24,076,30163,147,476, 58,711,286 and 14,408,35446,200,408 for the years ended December 31, 2001,
2000 and 1999, respectively. Diluted loss per common share is adjusted for the
assumed exercise of stock options and warrants unless such adjustment would have
an anti-dilutive effect
Concentration of Credit Risk
Financial instruments which potentially subject Dauphin to concentrations of
credit risk consist principally of accounts receivable. Generally, credit risk
with respect to accounts receivable is diversified due to the number of entities
comprising Dauphin's customer base. However, one individual customer accounted
for approximately 50% and 53% of total accounts receivable at December 31, 1997, 19962001
and 1995,2000, respectively and the same customer accounted for approximately 45% and
53% of total revenues for the year ended December 31, 2001 and 2000,
respectively. Diluted
earnings per share are calculated using earnings availableAnother customer accounted for approximately 42% of total revenues
for the year ended December 31, 2001.
Use of Estimates
The presentation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to each sharemake estimates and assumptions. These estimates
and assumptions affect the reported amounts of common stock outstanding duringassets and liabilities, the
perioddisclosure of contingent assets and to each share that
would have been outstanding assumingliabilities at the issuancedate of common shares for
all dilutive potential common shares outstandingthe consolidated
financial statements, and the reported amounts of revenue and expenses during
the reporting period. ThereActual results could differ from those estimates.
New Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No.141 ("SFAS No. 141"), "Business
Combinations", and Statement of Financial Accounting Standards No. 142 ("SFAS
No. 142"), "Goodwill and Intangible Assets". SFAS No. 141 is
no differenceF-16
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
4. SUMMARY OF MAJOR ACCOUNTING POLICIES - Continued
New Accounting Pronouncements -Continued
effective for all business combinations completed after June 30, 2001. SFAS No.
142 is effective for fiscal years beginning after December 15, 2001; however,
certain provisions of such Statement apply to goodwill and other intangible
assets acquired between basicJuly 1, 2001, and diluted earnings per
share as there are no potential dilutive common shares.
Tothe effective date three customers represent over seventy percent of revenueSFAS No. 142.
Major provisions of these Statements and their effective dates for
RMS.
3. BUSINESS DEVELOPMENT
R. M. Schultz & Associates, Inc.
On June 6, 1997, the Company
are as follows:
1. All business combinations initiated after June 30, 2001 must use
the purchase method of accounting. The pooling of interest method
of accounting is prohibited except for transactions initiated
before July 1, 2001.
2. Intangible assets acquired in a business combination must be
recorded separately from goodwill if they arise from contractual
or other legal rights or are separable from the acquired entity
and can be sold, transferred, licensed, rented, or exchanged,
either individually or as part of a related contract, asset, or
liability.
3. Goodwill, as well as intangible assets with indefinite lives,
acquired after June 30, 2001, will not be amortized. Effective
January 1, 2002, all outstanding common stockpreviously recognized goodwill and intangible
assets with indefinite lives will no longer be subject to
amortization.
4. Effective January 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and
whenever there is an impairment indicator.
5. All acquired goodwill must be assigned to reporting units for
purposes of Richard M. Schultzimpairment testing and Associates, Inc., for $2,430,258, consisting of
issuance of common stock for $233,200 and an assumption of $2,197,058 of
liabilities.segment reporting.
The transaction was accounted for as a purchase. The
price was allocated to accounts receivable ($590,330), inventories
($772,658), other current assets ($43,716), property and equipment
($148,108), withCompany has written-off the remaining amount ($875,446) being allocated to
goodwill. The goodwill is being amortized over 20 years and the
amortization expense for 1997 was $20,427.
Under the termsas of the acquisition, RMS shareholders received 220,000
sharesend of Dauphin common stock,the year in
accordance with an additional 105,000SFAS 121, therefore the provisions of such
shares deposited into an escrowSFAS 141 and SFAS 142 will
not effect the Company.
During 2001, the FASB issued SFAS 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, to address significant implementation issues related to
SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, and to develop a single accounting model to account
for long-lived assets to be released equallydisposed of. SFAS 144 carries over the next
three yearsrecognition
and measurement provisions of SFAS 121. Accordingly, an entity should recognize
an impairment loss if certain financial goalsthe carrying amount of RMSa long-lived asset or asset group
(a) is not recoverable and (b) exceeds its fair value. Similar to SFAS 121, SFAS
144 requires an entity to test an asset or asset group for impairment whenever
events or circumstances indicate that its carrying amount may not be
recoverable. SFAS 144 provide guidance on estimating future cash flows to test
recoverability. SFAS 144 includes criteria that have to be met for an entity to
classify a long-lived asset or asset group as held for sale. However, if the
criteria to classify an asset as held for sale are achieved. Uponmet after the balance sheet
date but before the issuance of the shares, there willfinancial statements, the asset group would
continue to be an additional elementclassified as held and used in those financial statements when
issued, which is a change from current practice. The measurement of a long-lived
asset or asset group classified as held for sale is at the lower of its carrying
amount of fair value less cost related to the transaction that will be recorded as goodwill and
amortized over the remaining life.
Results ofsell. Expected future losses associated with
the operations of RMSa long-lived asset or asset group classified as held for sale
are included within the consolidatedexcluded from that measurement.
SFAS 144 is effective for financial statements commencing June 6, 1997. Unaudited pro forma
results as ifissued for fiscal years beginning
after December 15, 2001 and interim periods within those fiscal years. However,
the transaction occurred on January 1, 1996provisions of SFAS 144 related to assets to be disposed of are as follows
(unaudited):
Twelve Months Ended December 31,
1997 1996
Revenues $ 4,614,121 $ 5,290,490
(Loss) before extraordinary item (4,418,852) (1,556,273)
Net income (4,418,852) 36,509,100
Basic and diluted earnings (loss)
per share before extraordinary item $ (0.14) $ (0.07)
Basic and diluted earnings (loss)
income per share (0.14) 1.52
Weighted average shares outstanding 30,734,045 24,076,301
Such pro forma information is not necessarily indicative of the results
of future operations.
CADserv Corporation
On September 4, 1997, the Company signed a letter of understanding to
acquire CADserv Corporation ("CADserv"). CADserv is wholly ownedeffective for
disposal activities initiated by an officerentity's commitment to a plan after the
effective date or after the Statement are initially applied.
F-17
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
- --------------------------------------------------------------------------------
5. INVENTORY
Inventory is comprised of material, labor and a major shareholder of the Company. As of the date hereof,
the letter of understanding has been verbally extendedoverhead and the
acquisition of CADserv is pending the approval of the Company's Board of
Directors and procurement of the necessary financing. No valuation or
price has been determined and no definitive agreements have been
entered.
Other
In 1996 the Company established a 401(k) retirement and pension plan.
The plan provides for discretionary contributions by the Company. There
were no contributions in 1997 or 1996.
4. SHORT-TERM BORROWINGS:
Short-term borrowings consistconsists of the
following at December 31:
1997 1996
LaSalle Bank Cash Collateral Account2001 2000
---- ----
Finished goods $ 71,421359,890 $ 88,211
Work in process 156,040 156,040
Raw materials 2,984,145 2,752,714
---------- ----------
3,500,075 2,996,965
Less - DCCA Loan 5,634Reserve for Obsolescence 2,981,623 2,491,216
---------- ----------
Less - Advacom/Adler & Associates 10,339Reserve for obsolescence 2,981,623 2,491,216
---------- ----------
$ 518,452 $ 505,749
========== ==========
During the fourth quarter of 2001, the Company determined that its current
inventory could not be used in the production of a new version of the Orasis(R),
when it is completed, and therefore adjusted its remaining raw materials and
work in process inventory to an estimated liquidation value. The Company plans
on liquidating this inventory in the second quarter of 2002. The amount of the
write down was $490,000. During the fourth quarter of 2000, the Company wrote
down approximately $1,440,000 of inventory, consisting primarily of raw
materials, and disposed of certain excess and obsolete inventory which will not
be used in the production of the Orasis(R) or the set top box. In addition, the
Company also set up a reserve for obsolescence of approximately $510,000 to
adjust for the net realizable value of the remaining inventory associated with
the Orasis(R). Upon liquidation and disposal of the inventory, the reserve for
obsolescence will be adjusted.
6. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
2001 2000
---- ----
Furniture and fixtures $ 249,007 $ 89,084
Office equipment 480,765 374,732
Manufacturing and warehouse equipment 1,039,282 624,690
Leasehold improvements 131,780 407,186
Plastic molds for the Orasis(R) - 696,862
Building 400,000 400,000
Automobile - 12,273
---------- -----------
2,300,834 2,604,827
Less - Accumulated depreciation and amortization 475,899 1,127,040
---------- -----------
$ 1,824,935 $ 1,477,787
=========== ===========
During the fourth quarter of 2001, the Company decided to terminate its
operations at the facilities in McHenry, Illinois and liquidate the remaining
assets. The property and equipment at this facility were written down to an
estimated liquidation value. The result was a write down of obsolete assets of
$221,000. In addition, in the fourth quarter the Company concluded that the
plastic molds for the Orasis(R) were deemed unusable in the development and
production of a new version of the Orasis(R) and were written off, resulting in
a charge of approximately $305,000. The remaining liquidation value of the
assets has been reclassified to Assets not used in the Business.
F-18
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------- --------
Total short-term notes payable $ 87,394 $ -
======== ========
LaSalle Bank Cash Collateral AccountCONTINUED
7. INVESTMENT
During the third quarter of 1998, the Company invested in non-marketable
securities of a company that was managed by a former director of Dauphin. The
investment was carried on the books at cost. The Company recorded dividend
income of approximately $26,000 in 2000. Dividends were discontinued in 2001.
The Company has determined that due to the discontinuance of dividends and the
poor financial condition of the company, the carrying value has been impaired.
Therefore the Company wrote off the investment in 2001 in the amount of $290,000
and the expense is a revolving lineincluded in the asset impairment loss in the statement of
credit with
accounts receivable, inventory and unencumbered fixed assets as
collateral. The loan carried 16% annual interest rate.operations.
8. LONG-TERM DEBT
As of February
1, 1998, LaSalle Bank Cash Collateral Account has been paid. All assets
and Dauphin corporate guarantee that were posted as collateral for this
loan have been released.
Two other short-term borrowings represent amounts due to vendorsDecember 31, 2001, the fair value of RMS
that were converted from trade credits to short-term loans prior to
acquisition. Both loans are uncollateralized and are due in June 1998.
These loans carry 7% annual rate of interest.
5. LONG-TERM DEBT:long-term debt approximates its book
value. At December 31, long-term liabilities consist of:
1997 1996
McHenry County Department of
Planning and Development loan
for expansion of RMS, payable in
equal monthly installments over
84 months with 6% interest. This
loan has no collateral and is
due on 10/1/2004 $ 145,655 $ -
PACJETS Financial Ltd. surface
mount equipment lease, payable
in equal monthly installments
over 60 months. The lease is
collateralized by the equipment
and has a one dollar buy-out
option. The lease carries 12%
interest and is due on 10/15/2003 148,501 -
PACJETS Financial Ltd. Furniture
leases payable in equal installments
over 36 months. The lease carries a
23% annual interest rate and is due
on 11/15/2000 is collateralized by
the equipment and has a one dollar
buy-out option 54,262 -
Other represents capital lease for
certain vehicles, machinery and
equipment and certain priority tax
claims due and payable on an equal
monthly installments over 36 to 72
months. All debts are due from
starting in June 2000 through October
2002, carry interest rate ranging
from 9% to 18% 81,108 43,196
------------ ------------
Total long-term liabilities $ 429,526 $ 43,196
============ ============
2001 2000
------ ------
McHenry County Department of Planning and Development loan for
expansion of RMS, payable in equal monthly installments over 84
months with 6% interest. This loan is unsecured and is due on
October 1, 2004 $ 69,073 $ 89,508
PACJETS Financial Ltd. equipment ease, payable in equal monthly
installments over 60 months. The lease is collateralized by the
equipment and has a one-dollar buy-out option. The lease carries
12% interest and is due on October 15, 2003 52,891 92,575
PACJETS Financial Ltd. furniture lease payable in equal monthly
installments over 36 months. The lease carries a 23% annual
interest rate and was due on November 15, 2000. The lease was
collateralized by the furniture and has a one-dollar buy-out - 23,269
option
Other- Capital leases for certain vehicles, machinery and equipment
and certain priority tax claims due and payable in equal monthly
installments over 36 to 72 months. All debts, collateralized by
the equipment, are due October 2002 and carry interest rates
ranging from 9% to 18% 4,123 10,410
-------- --------
Total long-term liabilities 126,087 215,762
Less short-term 82,507 113,629
-------- --------
Total long-term $ 43,580 $102,133
======== ========
Future minimum debt payments are as follows:
Year Amount Due
1998---- ----------
2002 $ 83,782
1999 89,378
2000 90,006
2001 63,283
2002 61,470
Thereafter 41,607
------------82,507
2003 24,343
2004 19,237
---------
Total long-term debt:debt $ 429,526
============
6.126,087
=========
F-19
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
9. CONVERTIBLE DEBT AND WARRANTS
On September 28, 2001 the Company entered into a $10 million Securities Purchase
Agreement with Crescent International Ltd., an institutional investor. Under the
Securities Purchase Agreement, the Company issued a Convertible Note for $2.5
million on October 2, 2001. Although the Company had the option to issue further
convertible notes to Crescent subject to certain conditions precedent, such
option expired on February 1, 2002 and no additional notes were issued. In
addition, the Company issued warrants exercisable to purchase 700,000 shares of
common stock at a price of $1.3064 per share for a five-year term. The
Securities Purchase Agreement further permits the Company to sell to Crescent up
to $7.5 million in common stock of the Company over a 24-month period.
Additionally, the Company agreed not to exercise any drawdowns against its
existing common stock purchase agreement with Techrich International Ltd., which
expired on January 28, 2002.
The Securities Purchase Agreement permits the Company to sell to Crescent and
requires Crescent to purchase from the Company, at the Company's sole
discretion, common stock of the Company for up to $7.5 million over a 24-month
period. Individual sales are limited to $1.5 million, or a higher amount if
agreed to by the Company and Crescent, and each sale is subject to our
satisfaction of the following conditions precedent (none of which are within the
control of Crescent): (1) the Company's representations and warranties must be
true and complete, (2) the Company must have one or more then currently
effective registration statements covering the resale by Crescent of all shares
issued in prior sales to Crescent and issuable upon the conversion of the
Convertible Note, (3) there must be no dispute as to the adequacy of disclosures
made in any such registration statement, (4) such registration statements must
not be subject to any stop order, suspension or withdrawal, (5) the Company must
have performed its covenants and obligations under the Securities Purchase
Agreement, (6) no statute, rule, regulation, executive order, decree, ruling or
injunction may have been enacted, entered, promulgated or adopted by any court
of governmental authority that would prohibit the Company's performance under
the Securities Purchase Agreement, (7) the company's common stock must not have
been delisted from its principal trading market and there must be no trading
suspension of its common stock in effect, and (8) the issuance of the designated
number of shares of common stock with respect to the applicable sale must not
violate the shareholder approval requirements of the Company's principal trading
market. The aggregate amount of all sale shares and convertible notes issued
cannot exceed $10 million. The amount of the sale is limited to twice the
average of the bid price multiplied by the trading volume during the 22 trading
day period immediately preceding the date of sale. When the total amount of
securities issued to Crescent equals or exceeds $5 million, then the Company
shall issue to Crescent a subsequent incentive warrant exercisable to purchase
400,000 shares of common stock at a price equal to the bid price on the date the
incentive warrant is issued.
The Convertible Note was funded on October 2, 2001 and is due September 28,
2004. The Company shall not be required to pay interest on the Convertible Note
unless the Company fails to deliver shares upon conversion. In such event, the
Note will bear an interest rate of 8.0% per annum, payable in quarterly
installments. The Company has recorded a beneficial conversion feature on the
Convertible Note and Warrants based on the fair value of the common stock of
$0.99 per share as of the date of commitment. The Warrants with an exercise
price of $1.3064 per share, are valued using the Black-Scholes valuation method,
and are recorded at $684,600. The beneficial conversion feature is calculated to
be $914,279 and has been recorded as Additional Paid in Capital and a discount
to the Convertible Note. The beneficial conversion feature is being amortized
over three years, the life of the Note. For the year ended December 31, 2001,
the Company recognized $252,076 as interest expense on the amortization of the
beneficial conversion feature. At conversion, the Company may record an
additional beneficial conversion based on the market price of the stock at the
conversion date.
On March 30, 1999, the Company signed an agreement with Augustine Funds, LP
("Augustine"), an accredited investor operated by Augustine Capital Management.
Augustine agreed to commit up to $6 million according to the following
conditions:
F-20
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
9. CONVERTIBLE DEBT AND WARRANTS - Continued
A) The first closing for $1 million will occur upon execution of agreed upon
documentation as well as a deposit of 2 million common shares (which shall be
pledged by current shareholders) in escrow. This tranche will take the form of
an 8% promissory note convertible into stock beginning sixty days after closing.
B) If the Company's stock value is below the 5/8 bid for two consecutive days
the Company must replenish the escrow account with additional shares until the
escrow value is greater than $1.5 million. Augustine received a warrant to
purchase 100,000 shares of common stock at an exercise price of $1.00 per share
for the commitment.
In April 1999, the Company received the funds and subsequently deposited an
additional 400,000 shares into an escrow account to compensate for the decline
in share price. In May 1999, the note was converted into common stock and the
escrow account was disbursed to Augustine. The agreement with Augustine was then
cancelled.
10. STOCK-BASED COMPENSATION
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" the
Company has elected to continue to account for stock compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". During 2001 and 2000, the Company issued non-qualified stock options
to purchase 1,496,164 and 3,921,832 shares of common stock, respectively, to
certain key employees at exercise prices ranging from $0.50 to $3.875 per share
(approximating the market price at date of grant). The options vest immediately
and expire in three years if the individual is still employed with the Company.
Had the Company accounted for its stock options in accordance with Statement
123, at December 31, 2001 and 2000 pro forma earnings per share would have been:
December 31, 2001 December 31, 2000
Net loss as reported (000's) $ (13,252) $ (7,515)
Pro forma net loss for Statement 123 (000's) (15,232) (11,320)
Basic loss per common share as reported (0.21) (0.13)
Pro forma basic loss per common share (0.24) (0.19)
Diluted loss per common share as reported (0.21) (0.13)
Pro forma diluted loss per common share (0.24) (0.19)
For purposes of determining the pro forma effect of these options, the fair
value of each option is estimated on the date of grant based on the
Black-Scholes single-option-pricing model:
December 31, 2001 December 31, 2000
Dividend yield 0.0% 0.0%
Risk-free interest rate 5.0% 6.0%
Volatility factor 433% 224%
Expected life in years 2.75 2.60
F-21
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. STOCK-BASED COMPENSATION - Continued
Information regarding these options for 2001 and 2000 is as follows:
2001 2000
---- ----
Weighted Weighted
Average Average
Shares Exercise Shares Exercise Price
------ -------- ------ --------------
Price
-----
Options outstanding beginning of year 3,913,332 $ 1.1658 50,000 $ 0.6563
Options exercised (35,600) 0.8023 (2,000) 0.5000
Options granted 1,496,164 1.9679 3,921,832 1.1644
Options forfeited - - (56,500) 0.6604
---------- -------- --------- ------
Options outstanding at year end 5,373,896 $ 1.3913 3,913,332 $ 1.1658
Weighted average fair value of options granted
during the year $ 1.9679 $ 1.0316
Options exercisable at year end 5,373,896 3,913,332
Option price range at year end $ 0.50 to $4.3125 $ 0.50 to $4.3125
The following table summarizes information about the options outstanding at
December 31, 2001 and 2000:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------- --------------------------------
Range of Number of Weighted Avg. Weighted Avg. Number of Weighted Avg.
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
-------------- ------ ---------------- -------------- --------- --------------
$0.5000 1,084,500 1.02 $0.5000 1,084,500 $0.5000
$0.7600 3,750 2.92 $0.7600 3,750 $0.7600
$0.7812 1,810,000 1.97 $0.7812 1,810,000 $0.7812
$0.8700 16,000 2.88 $0.8700 16,000 $0.8700
$0.8900 139,066 2.88 $0.8900 139,066 $0.8900
$0.9531 25,000 1.98 $0.9531 25,000 $0.9531
$0.9800 50,000 2.75 $0.9800 50,000 $0.9800
$1.0000 416,000 1.09 $1.0000 416,000 $ 1.000
$1.0500 25,000 2.98 $1.0500 25,000 $ 1.050
$1.0800 240,000 2.68 $1.0800 240,000 $ 1.080
$1.1562 25,000 2.79 $1.1562 25,000 $1.1562
$1.1600 50,000 2.84 $1.1600 50,000 $1.1600
$1.1900 3,750 2.67 $1.1900 3,750 $1.1900
$1.3100 20,000 2.32 $1.3100 20,000 $1.3100
$1.3700 10,000 2.75 $1.3700 10,000 $1.3700
$1.4100 166,666 2.63 $1.4100 166,666 $1.4100
$1.4600 200,000 2.50 $1.4600 200,000 $1.4600
$1.5156 25,000 2.23 $1.5156 25,000 $1.5156
$2.7500 142,500 2.29 $2.7500 142,500 $2.7500
$3.5938 230,000 1.73 $3.5938 230,000 $3.5938
$3.8750 666,664 2.00 $3.8750 666,664 $3.8750
$4.3125 25,000 1.73 $4.3125 25,000 $4.3125
--------- ---- ------- --------- -------
Total for 2001 5,373,896 1.84 $1.3913 5,373,896 $1.3913
F-22
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. STOCK-BASED COMPENSATION - Continued
Options Outstanding Options Exercisable
- ------------------------------------------------------------------- -----------------------------
Range of Number of Weighted Avg. Weighted Avg. Number of Weighted Avg.
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
--------------- --------- ---------------- -------------- --------- --------------
$ 0.5000 1,092,500 2.02 $ 0.5000 1,092,500 $ 0.5000
$ 0.7812 1,810,000 2.97 $ 0.7812 1,810,000 $ 0.7812
$ 0.9531 25,000 2.99 $ 0.9531 25,000 $ 0.9531
$ 1.0000 400,000 2.02 $ 1.0000 400,000 $ 1.0000
$ 2.7500 47,500 2.80 $ 2.7500 47,500 $ 2.7500
$ 3.5938 180,000 2.61 $ 3.5938 180,000 $ 3.5938
$ 3.8750 333,332 2.76 $ 3.8750 333,332 $ 3.8750
$ 4.3125 25,000 2.74 $ 4.3125 25,000 $ 4.3125
--------- ---- -------- --------- --------
Total for 2000 3,913,332 2.60 $ 1.1658 3,913,332 $ 1.1658
11. WARRANTS
During 2001 and 2000, the Company issued warrants to purchase 983,672 and
6,309,972 shares of common stock, respectively, to certain investors at exercise
prices ranging from $0.20 to $5.481 per share (approximating the market price at
date of grant). The warrants expire in three to five years. The warrants issued
to consultants are measured at fair value and recorded as expense, while the
warrants issued in capital raising are measured in fair value and recorded as an
allocation of the capital received. The warrants are recorded at the fair value
estimated on the date of grant based on the Black- the Black-Scholes
single-option-pricing model:
December 31, 2001 December 31, 2000
Dividend yield 0.0% 0.0%
Risk-free interest rate 5.0% 6.0%
Volatility factor 433% 224%
Expected life in years 2.75 2.60
Information regarding these warrants for 2001 and 2000 is as follows:
2001 2000
---- ----
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Warrants outstanding beginning of year 8,522,572 $ 2.0809 4,221,958 $ 0.7258
Warrants exercised (285,000) 0.6221 (2,009,358) 0.6366
Warrants granted 983,672 1.3316 6,309,972 2.5264
Warrants expired (22,500) 1.3896 - -
---------- ---------- ----------- ---------
Warrants outstanding at year end 9,198,744 $ 2.0477 8,522,572 $ 2.0809
Weighted average fair value of options granted
during the year $ 1.3316 $ 2.5264
Warrants exercisable at year end 9,198,744 8,522,572
Warrant price range at year end $0.20 to $5.481 $0.20 to $5.481
F-23
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
11. WARRANTS - Continued
The following table summarizes information about the warrants outstanding at
December 31, 2001 and 2000:
Warrants Outstanding Warrants Exercisable
- -------------------------------------------------------------------------- -------------------------------
Range of Number of Weighted Avg. Weighted Avg. Number of Weighted Avg.
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
--------------- -------- ---------------- -------------- --------- --------------
$0.2000 60,000 0.97 $0.2000 60,000 $0.2000
$0.2300 125,000 0.66 $0.2300 125,000 $0.2300
$0.2500 924,000 1.01 $0.2500 924,000 $0.2500
$0.3500 125,000 2.66 $0.3500 125,000 $0.3500
$0.4600 220,100 2.53 $0.4600 220,100 $0.4600
$0.5000 877,863 0.77 $0.5000 877,863 $0.5000
$0.5500 150,000 0.34 $0.5500 150,000 $0.5500
$0.6000 50,000 0.16 $0.6000 50,000 $0.6000
$1.0000 840,000 1.21 $1.0000 840,000 $1.0000
$1.3064 700,000 4.74 $1.3064 700,000 $1.3064
$1.0312 125,000 1.99 $1.0312 125,000 $1.0312
$1.1000 200,000 2.20 $1.1000 200,000 $1.1000
$1.1452 22,006 2.72 $1.1452 22,006 $1.1452
$1.2500 35,000 1.96 $1.2500 35,000 $1.2500
$1.3600 70,000 2.31 $1.3600 70,000 $1.3600
$1.5000 666,666 1.47 $1.5000 666,666 $1.5000
$2.0000 1,806,000 1.04 $2.0000 1,806,000 $2.0000
$3.2668 25,714 1.88 $3.2668 25,714 $3.2668
$4.0579 51,751 1.62 $4.0579 51,751 $4.0579
$4.2244 49,712 1.66 $4.2244 49,712 $4.2244
$4.4369 18,932 1.84 $4.4369 18,932 $4.4369
$5.0000 1,806,000 1.04 $5.0000 1,806,000 $5.0000
$5.4810 250,000 1.27 $5.4810 250,000 $5.4810
--------- ---- ------- --------- -------
Total for 2001 9,198,744 1.45 $2.0477 9,198,744 $2.0477
$0.2000 60,000 1.97 $0.2000 60,000 $0.2000
$0.2300 135,000 1.66 $0.2300 125,000 $0.2300
$0.2500 924,000 2.01 $0.2500 924,000 $0.2500
$0.3500 125,000 3.66 $0.3500 125,000 $0.3500
$0.4600 220,100 3.53 $0.4600 220,100 $0.4600
$0.5000 1,077,863 1.77 $0.5000 877,863 $0.5000
$0.5500 150,000 1.34 $0.5500 150,000 $0.5500
$0.6000 50,000 1.16 $0.6000 50,000 $0.6000
$1.0000 890,000 2.11 $1.0000 840,000 $1.0000
$1.0312 125,000 2.99 $1.0312 125,000 $1.0312
$1.1000 200,000 3.20 $1.1000 200,000 $1.1000
$1.2500 35,000 2.96 $1.2500 35,000 $1.2500
$1.2938 15,000 0.36 $1.2938 15,000 $1.2938
$1.5000 500,000 1.03 $1.5000 666,666 $1.5000
$1.5813 7,500 0.54 $1.5813 7,500 $1.5813
$2.0000 1,806,000 2.04 $2.0000 1,806,000 $2.0000
$3.2668 25,714 2.88 $3.2668 25,714 $3.2668
$4.0579 51,751 2.62 $4.0579 51,751 $4.0579
$4.2244 49,712 2.66 $4.2244 49,712 $4.2244
F-24
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
11. WARRANTS - Continued
Warrants Outstanding Warrants Exercisable
- ----------------------------------------------------------------------- --------------------------------
Range of Number of Weighted Avg. Weighted Avg. Number of Weighted Avg.
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
--------------- ------ ---------------- -------------- ------ --------------
$4.4369 18,932 2.84 $4.4369 18,932 $4.4369
$5.0000 1,806,000 2.04 $5.0000 1,806,000 $5.0000
$5.4810 250,000 2.27 $5.4810 250,000 $5.4810
--------- ---- ------- --------- -------
Total for 2000 8,522,572 2.05 $2.0809 8,522,572 $2.0809
In December 2000, the Company re-priced approximately 3,012,000 warrants it had
previously issued to outside consultants. The warrants were originally issued
with an exercise price ranging from $10.00 to $5.00, and were re-priced with
exercise prices ranging from $5.00 to $2.00 per share. The re-pricing created a
charge to earnings of approximately $234,000, which was calculated using the
Black-Scholes pricing model assuming 0% dividend yield, risk free interest rate
of 6%, volatility factor of 224% and an expected life of 2.6 years.
12. EMPLOYEE BENEFIT PLAN
The Company maintains a salary deferral 401(k) plan covering substantially all
employees who meet specified service requirements. Contributions are based upon
participants' salary deferrals and compensation and are made within Internal
Revenue Service limitations. For the years 2001, 2000 and 1999, the Company did
not make any matching contributions. The Company does not offer post-employment
or post-retirement benefits. The Company does not administer this plan, and
contributions are determined in accordance with provisions of the plan.
13. IMPAIRMENT OF ASSETS
On an ongoing basis, the Company estimates the future undiscounted cash flows,
before interest, of the operating unit to which the goodwill relates in order to
evaluate its impairment. If there is an indication of impairment exists, the
carrying amount of the goodwill is reduced to its fair value by the estimated
shortfall of cash flows. During the fourth quarter of 2001 the Company
determined that the set-top box design was completed and the design services
business with outside customers was declining, therefore an impairment of the
goodwill associated with the acquisition of ADD occurred. The Company revised
its projections and determined that the projected results would not fully
support the goodwill balance. In accordance with the Company policy, management
assessed the recoverability of goodwill using a cash flow projection based on
the remaining amortization period of three and three quarter years. Based on
this projection, the cumulative cash flow over the remaining period was
insufficient to fully recover the goodwill. The Company estimated there was no
value and the remaining goodwill of decided to write off the remaining
$3,987,500 was written off of goodwill.
In addition, the Company determined that the carrying value of its investment in
non-marketable securities had been impaired since the investment had
discontinued paying dividends in 2001 and due to the overall poor financial
condition of the company. Therefore, the Company wrote off its investment in the
amount of $290,000.
During the fourth quarter of 2001, the Company decided to terminate its
operations at the facilities in McHenry, Illinois and liquidate the remaining
assets. The property and equipment at this facility were written down to an
estimated liquidation value. The result was a total write down of obsolete
assets of $221,000. In addition, during the fourth quarter the Company concluded
that the plastic molds for the Orasis(R) were deemed unusable in the development
and production of a new version of the Orasis(R) and the remaining undepreciated
value of approximately $305,000 was written off.
F-25
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. IMPAIRMENT OF ASSETS - Continued
During the third quarter of 1999 the Company experienced an impairment of the
goodwill associated with the acquisition of RMS, when an estimated cash flow
from the operating unit dramatically decreased. The Company recorded $767,475 as
an expense during 1999.
14. INCOME TAXES:
A reconciliation of the income tax expensebenefit on incomelosses at the U.S. federal
statutory rate to the reported income tax expense follows:
1997 1996 1995
2001 2000 1999
---- ---- ----
U.S. federal statutory rate applied to pretax income $ (1,355,926) $ (502,395) $ (270,236)loss $(4,117,158) $(2,379,856) $(2,143,858)
Permanent differences and adjustments 31,906 6,270 (153)
Tax assets and net25,269 33,112 785,739
Net operating loss carryforwardslosses not recognized for financial reporting purposes
(changes in valuation allowances) 1,324,020 496,125 270,389
------------ ---------- ---------4,091,889 2,346,744 1,358,119
----------- ----------- -----------
Income tax provision $ - $ - $ -
============ ========== =========
As of December 31, 1997 and 1996,=========== =========== ===========
As of December 31, 2001 and 2000, the Company had generated deferred tax assets
as follows:
December 31,
1997 1996------------
2001 2000
---- ----
Gross deferred tax assets-
Net operating loss (NOL) carryforward $ 7,779,866 $ 4,629,283$47,019,457 $33,295,253
Reserves for inventory obsolescence 2,068,734 185,7832,981,623 2,491,216
Bad debt reserve 7,50050,621 50,621
Depreciation 86,704 39,349
Goodwill - Vacation Accrual 58,377275,000
Asset Impairment 290,000 -
Assets not used in business 525,691 -
Other timing differences 37,053 -
------------ -------------
9,951,530 4,815,06610,200 10,200
----------- -----------
50,964,296 36,161,639
Current federal statutory rate 34% 34%
------------ ------------------------ -----------
Deferred tax assets 3,383,520 1,637,122
Less- SFAS 10917,327,861 12,294,957
Less valuation allowance (3,383,520) (1,637,122)
------------ -------------17,327,861 12,294,957
----------- -----------
Net deferred tax asset $ - $ -
============ =============
Deferred income taxes include the tax impact of NOL=========== ===========
Deferred income taxes include the tax impact of net operating loss (NOL)
carryforwards. Realization of these assets, as well as other assets listed
above, is contingent on future taxable earnings by the Company. A valuation
allowance of $17,327,861 and $12,294,957 at December 31, 2001 and 2000,
respectively, has been applied to these assets. During 1995, there was an
ownership change in the Company as defined under Section 382 of the Internal
Revenue Code of 1986, which adversely affects the Company's ability to utilize
the NOL carryforward.
F-26
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
15. BUSINESS SEGMENTS:
The Company has adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information". During 2001, the Company has three
reportable segments: Dauphin Technology, Inc., ("Dauphin"), Advanced Digital
Designs, Inc. ("ADD") and Suncoast Automation, Inc. ("Suncoast"). During 2000,
the Company had two reportable segments: Dauphin and ADD. During 1999, the
Company had two reportable segments: Dauphin and R.M. Schultz & Associates, Inc.
("RMS"). Dauphin is involved in design, manufacturing and distribution of
hand-held pen-based computer systems and accessories. ADD is a design
engineering company performing design services, process methodology consulting
and intellectual property development. Suncoast provides private, interactive
cable systems to the hospitality industry. RMS was an electronic contract
manufacturing firm. The operations of RMS were terminated in 1999 because the
entity was not profitable and used, rather than provided, cash in its
operations.
The reportable segments are managed separately because each business has
different customer requirements, either as a result of the regional environment
of the country or differences in products and services offered. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. Intangible assets are included in each
segment's reportable assets and the amortization of these intangible assets is
included in the determination of a segment's operating profit or loss. The
Company evaluates performance based on profit or loss from operations before
income taxes, interest, and non-operating income (expenses).
2001 2000 1999
---- ---- ----
Revenue
-------
Dauphin $ 1,138,858 $ 63,913 $ 273,544
RMS - -
ADD 2,668,599 984,674 2,134,563
Suncoast 135,187 - -
Inter-company elimination (1,322,437) (188,750) (129,049)
------------ ------------ ------------
Total 2,620,207 859,837 2,279,058
Operating (Loss)
Dauphin (13,851,651) (7,523,421) (2,947,396)
RMS - - (4,286,231)
ADD (186,196) (195,911) -
Suncoast (488,607) - -
Inter-company elimination ,322,437 88,750 (4,298)
------------ ------------ ------------
Total (13,204,017) (7,530,582) (7,237,925)
Assets
------
Dauphin 17,355,029 17,794,438 6,443,079
RMS 106,116 598,782 2,156,937
ADD 2,699,250 6,735,372 -
Suncoast 1,702,791 - -
Inter-company elimination (17,945,762) (13,967,815) (5,227,862)
------------ ------------ ------------
Total 3,917,424 11,160,777 3,372,154
Capital Expenditures
--------------------
Dauphin 377,590 2,195 18,544
RMS - - 7,136
ADD - - -
Suncoast 283,693 - -
------------ ------------ ------------
Total 661,283 2,195 25,680
F-27
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
16. COMMITMENTS AND CONTINGENCIES:
The Company conducts its operations from facilities which are rented under
non-cancelable operating leases. The leases on these facilities expire
throughout 2002 and contain renewal options and escalation clauses. Minimum
rental payments for 2002 amount to approximately $210,000, including real estate
taxes. Total rental expense was approximately $376,000, $294,000 and $300,000
for 2001, 2000 and 1999 respectively.
During 2001 and through the date of this report, the Company has been engaged in
various legal proceedings. Management believes that any existing litigation
would not be material to the overall financial condition of the Company.
17. RELATED-PARTY TRANSACTIONS:
CADserv, an engineering services company based in Schaumburg, Illinois,
controlled by an Officer and a major shareholder, has contributed to the design
and development of the new version of the Orasis(R) and assisted the Company in
the design of the set-top box. The Company paid $72,573 in 2001 for such
services.
RMS facilities are leased from Enclave Corporation, a company that is owned by
the former President of RMS whose contract with the Company was terminated on
May 14, 1999. The Company paid $182,337 of rent and $32,380 in real estate taxes
or the property lease in 2001, $179,468 of rent and $30,206 of real estate taxes
for the property lease in 2000 and $179,684 of rent and $24,150 of real estate
taxes for 1999.
18. EQUITY TRANSACTIONS:
2001 Transactions
During the first quarter of 2001, the Company received proceeds in the amount of
$102,300 for the exercise of 210,000 warrants. Additionally, employees exercised
4,000 stock options at a price of $.50 per share.
During the second quarter of 2001, employees exercised 4,000 stock options at a
price of $.50 per share
In April 2001, the Company issued to certain consultants 30,000 shares of common
stock and warrants to purchase 70,000 shares of common stock at an exercise
price of $1.36 per share, as payment for certain promotional and consulting
services. In September 2001, the Company issued additional warrants to purchase
16,666 shares of common stock at an exercise price of $1.395 per share to
finalize the arrangement with the consultants.
Effective July 1, 2001, the Company completed the acquisition of substantially
all of the assets of Suncoast Automation, Inc., a wholly owned subsidiary of
ProtoSource Corporation, pursuant to an Asset Purchase Agreement. The purchase
price was 766,058 shares of the Company's common stock valued at approximately
$1.1 million based on the closing bid price of $1.47 per share on June 29, 2001.
During the third quarter of 2001, the Company received proceeds in the amount of
$75,000 for the exercise of 75,000 warrants.
On August 14, 2001 the Company issued a drawdown notice in connection with the
common stock purchase agreement with Techrich International for $300,000. Upon
receipt of the funds, the Company issued 258,968 shares of common stock and
warrants to purchase 22,006 shares of common stock at an exercise price of
$1.14516.
F-28
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
18. EQUITY TRANSACTIONS - Continued
On September 13, 2001 the Company filed with the Securities and Exchange
Commission a Form S-3 registration statement relating to 6,964,724 shares of
common stock. The shares were issued by the Company in respect of the following:
(i) 766,058 shares were issued by the Company in connection with the acquisition
of the net assets of Suncoast; (ii) 52,000 shares were issued by the Company as
payment for certain advertising and promotional expenses and consulting
services; and (iii) 6,146,666 shares issuable by the Company to shareholders
upon the exercise by them of issued and outstanding warrants and options. On
September 27, 2001, the Securities and Exchange Commission declared the
registration statement effective.
During the fourth quarter of 2001, employees exercised 27,600 stock options at a
price of $.89 per share.
In November 2001, the Company issued warrants to purchase 175,000 shares of
common stock at exercise prices ranging from $1.00 to $1.50, as payment for
certain advertising and promotional expenses.
On November 19, 2001 the Company filed with the Securities and Exchange
Commission a Form S-1 registration statement relating to 4,000,000 shares of
common stock to be issued upon the conversion of the Convertible Note (see Note
9). This registration statement is still pending approval by the Securities and
Exchange Commission.
Personal Guarantee
On April 3, 2001, the Company and Estel Telecommunications S.A. cancelled the
performance bond issued on October 26, 2000 and the 1,550,000 shares of
restricted stock held by Best S.A. were returned to the Company. In connection
with the cancellation of the shares, Best S.A. executed the personal guarantee
of Mr. Andrew J. Kandalepas, which he had granted to secure the performance of
the Company's obligation to register the 1,550,000 shares issued in connection
with the performance bond and retained the 1,032,118 shares. The set-top box
agreement with Estel Telecommunications S.A. terminated on July 1, 2001 due to
lack of performance on behalf of Estel. This transaction was entered into on
behalf of the Company and therefore the Company recorded an expense of
$1,241,741, with an offsetting entry to additional paid in capital.
On December 20, 2001, the Board of Directors approved the issuance of 1,032,118
shares to the Chairman of the Board and CEO of the Company to replace the shares
that Best S.A. retained under the personal guarantee. The shares were valued at
$1,241,741 based on the closing price of $1.20 on April 3, 2001.
2000 Transactions
During the first and second quarter of 2000, the Company conducted a private
placement of 4,654,613 common shares and approximately 1,300,000 warrants to a
group of accredited investors in exchange for approximately $7,300,000. The
proceeds were used to settle the majority of trade payables, for day-to-day
operations and to start the development of the set-top box.
In January 2000, the Company issued 480,000 shares to a customer in exchange for
cancellation of $300,000 of customer deposits.
In January 2000, the Company issued warrants to an investment banker, for
services rendered, to purchase 350,000 shares at an exercise price of $1.00.
In January 2000, the Company issued 500,000 shares to a consulting firm for
services rendered in relation to the set-top box agreement with Estel
Telecommunications S.A.
F-29
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
18. EQUITY TRANSACTIONS - Continued
In April 2000, the Company completed its private placement and issued 3,630,000
warrants to an investment banker in lieu of consulting fees.
On April 26, 2000, the Company completed a common stock purchase agreement,
escrow agreement and registration rights agreement with Techrich International
Limited ("Techrich"). These agreements provide a $100,000,000 equity line of
credit as the Company requests over an 18 month period, in return for common
stock and warrants to be issued to the investor. Once every 22 days, the Company
may request a draw of up to $10,000,000 of that money, subject to a maximum of
18 draws. The maximum amount the Company actually can draw down upon each
request will be determined by the volume-weighted average daily price of the
Company's common stock for the 22 trading days prior to its request and the
average trading volume for the 45 trading days prior to the request. Each draw
down must be for at least $250,000. Use of a 22 day trading average was
negotiated to reduce the impact of market price fluctuations over any calendar
month, which generally includes 22 trading days. At the end of a 22-day trading
period following the drawdown request, the amount of shares is determined based
on the volume-weighted average stock price during that 22-day period in
accordance with the formulas in the common stock purchase agreement.
On April 28, 2000, the Company filed with the Securities and Exchange Commission
a Form S-1 registration statement relating to 15,332,560 shares of common stock
issued to stockholders in private transactions, 11,958,963 shares for other
stockholders, and 6,000,000 shares to be issued when the Company requests a
drawdown under the common stock purchase agreement referred to above.
On July 28, 2000, the Securities and Exchange Commission declared the
registration statement effective. Pursuant to the common stock purchase
agreement with Techrich, the Company issued as a placement fee warrants to
purchase 250,000 shares of common stock at an exercise price of $5.481.
On July 31, 2000, the Company issued a drawdown notice in connection with the
common stock purchase agreement with Techrich for $5,000,000. Upon receipt of
the funds, the Company issued 1,354,617 shares of common stock and warrants to
purchase 101,463 shares of common stock at exercise prices ranging from $4.06 to
$4.22.
In September 2000, the Company issued 73,750 stock options to certain employees
under employment agreements. At the time of issuance, the option price was below
the market price and the Company recorded $70,622 as additional compensation
expense.
On October 17, 2000, the Company issued a drawdown notice in connection with the
common stock purchase agreement with Techrich for $2,000,000. Upon receipt of
the funds, the Company issued 781,999 shares of common stock and warrants to
purchase 44,646 shares of common stock at exercise prices ranging from $3.26676
to $4.4369.
On October 20, 2000 the Company entered into an agreement with Best S.A. to act
as its distributor/agent in Greece. On October 26, 2000 the Company issued
1,550,000 shares of restricted stock to Best S.A. as a performance bond to
assure the Company's compliance with the Set-Top Box Agreement by and between
the Company and Estel S.A. These shares have not been included in the issued and
outstanding shares as of December 31, 2000, as Best S.A. has acknowledged that
they would return the shares to the Company upon satisfactory compliance with
the Set-Top Box Agreement. The agreement with Best S.A. requires the Company to
register these shares with the Securities and Exchange Commission during 2000.
To secure performance of the Company's obligation to register these shares,
Andrew J. Kandalepas, Chairman of the Board and CEO of the Company, granted to
Best S.A. a security interest in 1,032,118 shares of Company stock owned by him.
F-30
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
18. EQUITY TRANSACTIONS - Continued
In December 2000, the Company issued 22,000 shares of common stock and warrants
to purchase 148,265 shares of common stock at exercise prices ranging from
$1.0312 to $1.25, as payment for certain advertising and promotional expenses
and consulting services related to the establishment of an office in Europe.
In December 2000, the Company re-priced approximately 3,012,000 warrants it had
previously issued to outside consultants. The warrants were originally issued
with an exercise price ranging from $10.00 to $5.00, and were re-priced with
exercise prices ranging from $5.00 to $2.00 per share. The re-pricing created a
charge to earnings of approximately $234,000, which was calculated using the
Black-Scholes pricing model assuming 0% dividend yield, risk free interest rate
of 6%, volatility factor of 224% and an expected life of 2.6 years.
1999 Transactions
In January and April 1999, the Company issued a total of 46,373 shares under an
employment contract with Richard M. Schultz, former President of RMS. As of May
14, 1999, the Company no longer employs Richard M. Schultz.
In February and March 1999, the Company issued a total of 87,380 treasury shares
and 1,570,927 shares in exchange for $660,000 of principal, $17,123 of interest
and $32,909 of original issue discount amortization on Convertible Debentures -
2001A. In addition, in March the short-term loan from an investor in the amount
of $250,000 together with $7,500 of interest was converted into 427,667 shares.
In March 1999, the Company issued warrants to an investment banker to purchase
50,000 shares at an exercise price of $0.60 exercisable after the market bid
price of the Company's stock exceeds $1.00 for 15 consecutive trading days. Also
in March of 1999 the Company issued warrants to the same investment banker to
purchase 50,000 shares at an exercise price of $0.50 exercisable after the
market bid price of the Company's stock exceeds $2.00 for 15 consecutive trading
days. The warrants were valued at $48,000 using the Black-Scholes securities
valuation model, assuming among other things, a 6% risk free interest rate, 0%
dividend yield, 1 and 2 year life respectively and 120% volatility.
In March 1999, the Company issued 507,160 shares to five accredited investors in
exchange for $403,492. In addition to the shares, the Company issued warrants to
purchase 300,000 shares of common stock at an exercise price of $1.10 per share
exercisable immediately. The warrants were valued at $165,600 using the
Black-Scholes securities valuation model, assuming among other things, a 7% risk
free interest rate, 0% dividend yield, 5 year life and 120% volatility.
On March 30, 1999, Dauphin signed an agreement with Augustine Funds LP
("Augustine"), an accredited investor operated by Augustine Capital Management,
where Augustine agreed to commit up to $6 million. The first closing for $1
million occurred on April 15, 1999 when the parties executed agreed upon
documentation and Dauphin deposited 2 million common shares in escrow. This
tranche was in the form of an 8% promissory note convertible into stock
beginning sixty days after closing. The conversion was at 15% discount from the
closing bid price of the Company's common stock. The contract also called for
the adjustment in escrowed shares in case stock value decreases, under the 5/8
bid for two consecutive days. As specified on the contract, on April 22 due to
decline in market price of the stock, the Company deposited additional 400,000
shares in an escrow account to replenish the $1.5 million value in the account.
As an incentive, Augustine received a warrant to purchase 100,000 common shares
of stock at an exercise price of $1.00 per share. The warrant was valued at
$52,200 using Black-Scholes securities valuation model, assuming among other
things, a 6% risk free interest rate, 0% dividend yield, 1 and 2 year life
respectively and 120% volatility. On May 24, 1999 $1 million funded under the
note, together with accrued interest, was converted into 2,441,414 shares of
common stock of which 2,400,000 common shares were disbursed to Augustine. The
agreement with Augustine has been cancelled.
F-31
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
18. EQUITY TRANSACTIONS - Continued
In May 1999, the Company issued 150,000 shares to two accredited investors in
exchange for $82,500. In addition to the shares the Company issued warrants to
purchase 150,000 shares of common stock at an exercise price of $0.55 per share.
The warrants are exercisable immediately and expire in three years. The warrants
were valued at $53,250 using the Black-Scholes securities valuation model,
assuming among other things, a 6% risk free interest rate, 0% dividend yield, 5
year life and 120% volatility.
In May 1999, the company issued 586,764 common shares in exchange for $240,000
of the remaining principal of the Convertible Debentures-2001A. That closed out
all debts the Company had in relation to the Convertible Debentures.
On May 28, 1999 the Company signed a Stock Purchase Agreement with Crescent
International Ltd. ("Crescent"), an investment company managed by GreenLight
(Switzerland) SA, which allows the Company and obligates Crescent to purchase
shares from the Company based on terms and conditions outlined in the agreement.
In total Crescent agreed to purchase up to $2,250,000 of the common stock within
the next twenty-four months. Crescent agreed to purchase from the Company shares
based on ninety percent of the daily average trading value, which is computed by
multiplying the closing bid price by the daily volume of the Company's common
stock traded average over the twenty days prior to closing. In connection
therewith the Company sold to Crescent 1,048,951 shares for $450,000 at an
average price of $0.43 per share including $58,000 of closing fees. The Company
has the right to sell additional shares with an interval of 25 business days
with a minimum of $100,000 per sale and a maximum of $500,000 based on the
average daily value as described above. In addition to the stock, Crescent
received an Incentive Warrant to purchase 750,000 common shares at a price of
$0.6435 per share. The Warrants were valued at $235,500 using Black-Scholes
securities valuation model assuming among other things 6% risk free rate, 0%
dividend yield, five years life and 120% volatility.
In connection with the Stock Purchase Agreement signed by the Company on May 28,
1999, the Company sold to Crescent 350,000 shares for $148,050 at an average
price of $0.423 per share, including $2,961 of closing fees.
In the third quarter of 1999, the Company issued 14,963 treasury shares and
2,086,540 common shares to a group of accredited investors in exchange for
$598,817 or an average of $0.29 per share. In addition to the shares the Company
issued warrants to purchase 1,651,600 shares of common stock at an average
exercise price of $0.47 per share. The warrants are exercisable immediately and
expire in three to five years. The Warrants were valued at $443,622 using
Black-Scholes securities valuation model assuming among other things 6% risk
free rate, 0% dividend yield, five years life and 120% volatility.
During the third quarter, the Company agreed to issue a total of 407,868 shares
to satisfy certain payables in the cumulative amount of $223,825 or
approximately $0.55 per share.
In September 1999, a Warrant for a total of 100,000 shares that was issued in
July 1999 was exercised at $0.53 per share. The Company received a total of
$53,000 from such exercise.
On October 26 1999, the Company issued 93,358 shares in exchange for $29,643 or
$0.32 per share net of $605 of closing fees in accordance with the Stock
Purchase Agreement signed by the Company on May 28, 1999 with Crescent.
On October 27, 1999 in connection with the Stock Purchase Agreement signed by
the Company on May 28, 1999 with Crescent, the Company sold to Crescent 447,012
shares for $141,935 at an average price of $0.32 per share, including $2,897 of
closing fees.
F-32
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
18. EQUITY TRANSACTIONS - Continued
In November 1999, the Company issued 457,650 shares to three accredited
investors in exchange for $156,500 or $0.33 per share.
During the third quarter of 1999 a Warrant for 302,858 shares at $0.20 was
exercised. The Company received a total of $60,285 for the shares. As of the
date of this report, these shares have not been issued.
In November 1999, in exchange for services rendered, the Company issued 300,000
shares to a consultant.
In December 1999, the Company converted $70,000 of short-term notes including
$5,000 of interest from an affiliate into 350,000 shares.
In December 1999, the Company issued 362,858 shares in exchange for $72,572 from
two accredited investors. In addition to shares, the Company issued two Warrants
for the total of 362,858 common shares to the investors with a strike price of
$0.20. The Warrants were valued at $68,637 using Black-Scholes securities
valuation model assuming among other things 6% risk free rate, 0% dividend
yield, five years life and 120% volatility.
19. ACQUISITIONS:
On July 1, 2001, the Company acquired substantially all of the assets of
Suncoast Automation, Inc. The purchase price was 766,058 shares of the Company's
common stock valued at $1,126,105 based on the closing bid price of $1.47 per
share on June 29, 2001. The transaction was accounted for under the purchase
method of accounting. The purchase price, was allocated as follows:
Accounts Receivable $ 14,669
Inventory 113,054
Prepaid expenses 24,326
Equipment 794,170
Installation contracts 320,000
-----------
1,266,105
Less Accounts payable 140,114
-----------
Total $ 1,126,105
===========
Pro Forma operating results as if the acquisition had occurred at the beginning
of the respective for the years ending December 31, 2001 an d 2000, as required
under Financial Accounting Standards No. 141, Business Combinations, are as
follows:
2001 2000
---- ----
Revenue $ 2,620,207 $ 1,064,676
Operating loss (13,652,231) (8,489,753)
Net loss (13,702,198) (8,365,215)
Net loss per share
Basic $ (0.22) $ (0.14)
Diluted $ (0.22) $ (0.14)
F-33
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
19. ACQUISITIONS - Continued
On August 28, 2000, the Company acquired T & B Designs, Inc. (formerly known as
Advanced Digital Designs, Inc.), Advanced Technologies, Inc. and 937 Plum Grove
Road Partnership in exchange for $3 million in cash and $3 million to be held in
escrow and disbursed in accordance with the terms and conditions of an Escrow
Agreement. The transaction was accounted for under the purchase method of
accounting. Goodwill was recorded and is to be amortized under the straight-line
method over a 5-year period.
The purchase price, plus direct costs of the acquisition, were allocated as
follows:
Building $ 400,000
Computer equipment 110,000
Other equipment 15,000
Excess of Cost over Net Assets Acquired 5,500,000
-----------
Total $ 6,025,000
===========
Pro Forma operating results as if the acquisition had occurred at the beginning
of the respective for the years ending December 31, 2000 and 1999, as required
under APB 16 (Accounting Principles Board Opinion number 16, regarding Business
Combinations), are as follows:
2000 1999
---- ----
Revenue $ 3,548,801 $ 5,513,493
Operating loss (7,023,058) (6,594,083)
Net loss (8,253,941) (8,650,289)
Net loss per share
Basic $ (0.14) $ (0.19)
Diluted $ (0.14) $ (0.19)
20. RESTATEMENT:
Selling, general and administrative expenses, interest expense, net loss and per
share amounts have been adjusted from previously reported amounts to offset the
difference between the quoted market price and the proceeds from stock sales
under a private placement in the first quarter of 2000 against additional paid
in capital rather than interest expense amounting to $1,302,383 ($0.02 per
share).
F-34
Dauphin Technology, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
A summary of selected quarterly information for 2001 and 2000 is
contingent on future taxable earnings by the Company. In accordance
with the provisions of SFAS 109, a valuation allowance of $(3,383,520)
and $(1,637,122) at December 31, 1997 and 1996, respectively, has been
applied to these assets. During 1995, there was an ownership change in
the Company as defined under Section 382 of the Internal Revenue Code of
1986, which adversely affects the Company's ability to utilize the NOL
carryforward.
7. EQUITY TRANSACTIONS:
1997 Transactions
During 1997, the Company, through several private transactions with
accredited investors, sold approximately 2.8 million of common stock for
approximately $2.7 million or approximately $0.98 per share. Of the
shares issued, 2.3 million were issued from treasury shares. As a
result of these transactions, the Company raised in excess of $2.6
million for its working capital, implementation of the Company's
acquisition strategy and research and development.
On July 16, 1997, the Company repurchased 745,126 shares held by Alan
S.K. Yong, former founder and President of Dauphin, for $260,794 or
$0.35 per share. Simultaneously, the Company accepted Mr. Yong's
resignation from the Board of Directors.
On September 5, 1997, under the employment contract, the Company issued
12,500 shares to Richard M. Schultz. Under the contract, Mr. Schultz is
entitled to purchase 50,000 common shares per year for the duration of
his employment contract at $1.00 below the market value on the date
immediately preceding the date of exercise. The common shares issued in
connection with this transaction were treasury shares.
In the fourth quarter, the Company conducted a private placement of
4,391,852 shares of common stock at $1.00 per share. All shares issued
were previously unissued and unregistered. In total, $4,391,852 was
raised. As of December 31, 1997, the Company closed this private
placement. As part of the transaction, a lead broker/dealer received
$439,185 or ten (10%) percent cash compensation and 131,756 common
shares or three (3) shares for each 100 shares placed as commission for
the amount raised. The broker/dealer also has an option to purchase
additional 175,674 shares or four (4) shares for each 100 shares placed
at a $1.00 each within one year from the close of this transaction.
1996 Transactions
On February 6, 1996 the Company entered into an agreement with Victor
Baron, Savely Burd and Interactive Controls, Inc., an Illinois
corporation ("Intercon"). Under the terms of the agreement, the Company
acquired a business plan devised by Intercon for the design and
manufacturing of industrial control systems and software. The Company
also agreed to employ Messrs. Baron and Burd and provided Intercon the
opportunity to receive (a) 1,000,000 shares of common stock the first
fiscal year the Company realizes aggregate gross revenue of $5,000,000;
(b) an additional 200,000 shares of common stock for each additional
$1,000,000 in gross sales revenues exceeding $5,000,000 and up to
$10,000,000; and (c) additional .25 shares of common stock for each
dollar in net earnings before taxes. The aggregate number of shares
issued under the Intercon agreement may not in any event exceed 25% of
the Company's shares outstanding as of the effective date of its Plan of
Reorganization. To date, no Intercon products have been developed or
produced under the business plan and no shares have been issued to
Intercon. Mr. Burd continues to serve as an employee and Chief
Financial Officer of the Company. Mr. Baron's employment with the
Company terminated on February 24, 1998.
On April 19, 1996, TPL, a related party, commenced a private placement
of certain 9% unsecured promissory notes convertible to certain
Company's shares received by it in connection with debtor-in-possession
financing provided by TPL to the Company. As a result of the private
placement and conversion of notes as specified in the Offering
Memorandum, the Company received $995,409, or sixty percent of the
proceeds of the private placement, in exchange for 888,757 reserve
shares at $1.12 per share.
On October 22, 1996 the Company issued a convertible note to
Tiedemann/Economos Global Emerging Growth Fund (a shareholder of the
Company) in the principal amount of $770,000. The note, at the election
of the holder, was converted into 1,100,000 common shares.
Simultaneously, the Company conducted a private placement to qualified
investors of 1,059,286 common shares for $796,616 or $0.75 per share.
The common shares issued in connection with these transactions were
unissued shares that were previously registered by the Company. The
funds obtained from these transactions were used to repurchase 2,159,286
common shares for $1,187,607 or $0.55 per share. As a result of the
transaction, the Company generated $379,009 for operating capital.
On November 12, 1996, the Company registered with the SEC all corporate
unregistered shares issued in private transactions and as a result of
bankruptcy settlement. Also, 2,950,000 reserve shares were registered
for future capital or expansion needs, of which 2,159,286 shares were
reissued in connection with above described share repurchase
transaction.
Subsequent Events
On January 5, 1997, under the employment contract, the Company issued
12,500 shares to Richard M. Schultz. Under the contract, Mr. Schultz is
entitled to purchase 50,000 common shares per year for the duration of
his employment contract at $1.00 below the market value on the date
immediately preceding the date of exercise. The common shares issued in
connection with this transaction were treasury shares.
8. COMMITMENTS AND CONTINGENCIES:
The Company is paying approximately $10,000 per month to rent its
corporate facilities. The lease has a three-year term with a five-year
renewal option. The Company leases RMS facilities for approximately
$14,000 per month. The lease on RMS facility has a five-year term with
an additional five-year optional extension.
9. RELATED-PARTY TRANSACTIONS:
CADserv, an engineering services company based in Schaumburg, Illinois,
controlled by an Officer and a major shareholder, has contributed to the
design, packaging and manufacturing of Dauphin's DTR and Orasis( product
lines and will likely continue in this capacity in the future.
In June, July and August 1997, the Company borrowed an aggregate sum of
$492,500 from related parties. As of the date of these financial
statements all funds have been repaid together with $35,220 of accrued
interest.
On July 16, 1997 the Company repurchased 745,126 shares held by Alan
S.K. Yong, former founder and President of the Company for $260,794 or
$0.35 per share. Simultaneously, the Company accepted Mr. Yong's
resignation from the Board of Directors.
On September 4, 1997, the Company signed a letter of understanding to
acquire CADserv. As of the date hereof, the letter of understanding has
been verbally extended and the acquisition of CADserv is pending the
approval of the Company's Board of Directors and obtain the necessary
financing.
RMS facilities are leased from Enclave Corporation that is owned by
Richard M. Schultz, President of RMS.
No person has been authorized to give any information or to make any
representations in connection with this offering other than those
contained in this Prospectus and, if given or made, such other
information and representations must not be relied upon as having been
authorized by the Company or the Selling Stockholders. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in
the affairs of the Company since the date hereof or that information
contained herein is correct as of any time subsequent to its date. This
Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the registered securities to
which it relates. This Prospectus does not constitute an offer to sell
or a solicitation of an offer to buy such securities in any
circumstances in which such offer or solicitation is unlawful.
------------
TABLE OF CONTENTS
Available Information 4
Prospectus Summary 5
The Company 5
The Registration 6
Summary Financial Information 7
Use of Proceeds 8
Forward Looking Statements 8
Risk Factors 8
Market Price of Common Stock
and Dividend Policy 12
Selected Financial Data 13
Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Business 15
Description of Property 19
Management 20
Executive Compensation 21
Principal Stockholders 22
Description of Capital Stock 23
Share Transfer Restrictions 24
Plan of Distribution 25
Selling Stockholders 25
Legal Matters 30
Experts 30
Index to Financial Statements F-1
7,487,935 COMMON SHARES
DAUPHIN TECHNOLOGY, INC.
COMMON STOCK
$0.001 Par Value
$1.281 Bid Price on March 13, 1998
__________
PROSPECTUS
__________
------------
March 13, 1998
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered hereby.
All amounts are estimated except the Securities and Exchange Commission
registration fee.
Amount
SEC registration fee $ 4,493.00
Blue Sky fees and expenses 3,000.00
Accounting fees and expenses 3,000.00
Legal fees and expenses 15,000.00
Printing 2,000.00
Registrar and transfer agent's fees 1,000.00
Miscellaneous fees and expenses 2,000.00
----------
Total $ 30,493.00
==========
Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Registrant is incorporated in the State of Illinois. Section 8.75 of
the Illinois Business Corporation Act defines the powers of registrant
to indemnify officers, directors, employees and agents.
In additional to the provisions of Illinois Business Corporation Act
Section 8.75, and pursuant to the power granted therein, registrant has
adapted Article XII of its Bylaws which provides as follows:
ARTICLE XII
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
SECTION 1 The corporation shall indemnify any person who was or is a
party, or is threaten to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right
of the corporation) by reason of the fact that he is or was a directors,
officer, employee or agent of the corporation or fiduciary of any
employee benefit plan maintained by the corporation, or who is or was a
director, officer, employee or agent of the corporation of a fiduciary
as aforesaid, or who is or was serving at the request of the corporation
as a director, officer, employee, agent of fiduciary of another
corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees), judgments, fines, and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding, if he acted in good
faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the corporation (or, in the case of a
fiduciary, the best interests of the plan and plan participants) and,
with respect to any criminal action proceeding, had no reasonable cause
to believe his conduct was unlawful. This termination of any action,
suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contender or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
which he reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had reasonable cause to believe that this conduct was
unlawful.
SECTION 2 The corporation shall indemnify any person who was or is a
party, or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or was
a director, officer, employee or agent of the corporation or fiduciary
as aforesaid, or is or was serving at the request of the corporation as
a director, officer, employee, or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorney's fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit, if he
acted in good faith and in a manner he reasonably believed to be in, or
not opposed to the best interests of the corporation (or, in the case of
a fiduciary, the best interests of the plan and plan participants),
except that no indemnification shall be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to
the corporation, unless, and only to the extent that the court in which
such action or suit was brought shall determine upon application that,
despite the adjudication of liability, but in view of all the
circumstances of the case, such person is fairly and reasonably entitled
to indemnify for such expenses as the court shall deem proper.
SECTION 3 To the extent that a director, officer, employee or agent of
a corporation or fiduciary as aforesaid has been successful, on the
merits or otherwise, in the defense of any action, suit or proceeding
referred to in proceeding sections, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including
attorney's fees) actually and reasonably incurred by him in connection
therewith.
SECTION 4 Any indemnification under section 1 and 2 hereof (unless
ordered by a court) shall be made by the corporation only as authorized
in the specific case, upon a determination of the director, officer,
employee, agent of fiduciary is proper on the circumstances because he
has met the applicable standard of conduct set forth in said sections.
Such determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties
to such action, suit or proceeding, or (2) if such a quorum is not
obtained, or even if obtainable, a quorum of disinterest directors so
directs, by independent legal counsel in a written opinion, or (3) by
the stockholders.
SECTION 5 Expenses incurred in defending a civil or criminal action,
suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding, as authorized by
the board of directors in the specific case, upon receipt of an
undertaking by or oh behalf of the director, officer, employee or agent
to repay such amount unless it shall ultimately be determined that he is
entitled to be indemnified by the corporation as authorized in this
Article.
SECTION 6 The indemnification provided by this Article shall not be
deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any bylaws, agreement, vote of
stockholders or disinterested directors, or otherwise, both as to action
in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has ceased to
be a director, officer, employee or agent, and shall incur to the
benefit of the heirs, executors and administrators of such person.
SECTION 7 The corporation may purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of
the corporation of fiduciary, or who is or was serving at the request of
the corporation as a director, officer, employee, agent or fiduciary of
another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against him and incurred by
him in any such capacity, or arising out of his status as such, whether
or not the corporation would have the power to indemnify him against
such liability under the provisions of this Article.
SECTION 8 In the case of a merger, the term "corporation" shall
include, in additional to the surviving corporation, any merging
corporation absorbed in a merger, which if its separate existence had
continued, would have had the power and authority to indemnify its
directors, officers and employees or agents, so that any person who was
a director, officer, employee or agent of such merging corporation, or
was serving at the request of another corporation, as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position
under the provisions of this section with respect to the surviving
corporation as such person would have with respect to such merging if
its separate existence had continued.
SECTION 9 For the purpose of this Article, referenced to "other
enterprises" shall include employee benefit plans; reference to "fines"
shall include any excise tax assessed on a person with respect to an
employee benefit plan; and references to the phrase "serving at the
request of the corporation" shall include any service as a director,
officer, employee, or agent with respect to an employee benefit plan,
its participants, or beneficiaries. A person who acted in good faith and
in a manner he or she reasonably believed to be in the best interests of
the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of
the corporation" as referred to in this Article.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of registrant
pursuant to the foregoing provisions, or otherwise, registrant has been
advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act
and is, therefore, enforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
registrant of expenses incurred in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, registrant
will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction
the questions whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such an issue.
Except to the extent herein above set forth, there is no charter
provision, bylaw, contract, arrangement or statute pursuant to which any
director or officer of registrant is indemnified in any manner against
any liability which he may incur in his capacity as such.
Item 15. RECENT SALES OF UNREGISTERED SECURITIES
The Shares were offered and sold in a private placement conducted by the
Company during the last calendar quarter of 1997 and are being
registered pursuant to certain registration rights granted to
subscribers. The sale and issuance of the Shares were believed to be
exempt from registration under the Securities Act by virtue of Section 4
(2) thereof and Regulation D as transactions not involving any public
offering. The recipients represented their status as accredited
investors at the time of subscription and their intention to acquire
securities for investment purposes only and not with a view to
distribution thereof. Appropriate legends were affixed to stock
certificates issued in such transactions and all recipients had adequate
access to information about the Company. In connection with these
transactions, ACAP Financial, Inc., a registered broker-dealer, was paid
an underwriting fee equal to $439,185, representing 10% of subscription
proceeds received by the Company from investors introduced by such
broker-dealer. ACAP Financial, Inc. also received 131,756 Shares and
such Shares are included in this registration, as well as an option to
purchase an additional 175,674 Shares at a price of $1.00
2001 Quarter Ended
------------------
March 31, June 30, Sept. 30, Dec. 31,
--------- ---------------------------- --------
Revenues $ 445,154 $ 382,087 $ 421,544 $ 1,371,422
Gross Profit (Loss) 116,569 67,272 50,737
(359,370)
Net Loss (1,015,162) (3,070,590)* (1,405,379) (7,761,229)
Net Loss per Share
during the twelve month period ending Decembershare
Basic $ (0.02) $ (0.05)* $ (0.02) $ (0.12)
Diluted $ (0.02) $ (0.05)* $ (0.02) $ (0.12)
2000 Quarter Ended
------------------
March 31, 1998.
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit No. Description of Document
*3(1) Certificate of Incorporation filed July 27, 1990, incorporated
herein by reference to exhibit 7(c)(1) of Form 8-K filed May 14, 1991.
*3(2) By-Laws as amended, incorporated herein by reference to exhibit
3(2) of Form 10-K for the fiscal year ended DecemberJune 30, Sept. 30, Dec. 31,
1991.
*4(1) Specimen Common Stock Certificate incorporated herein by reference
to exhibit 4(1) of Form S-18 filed June 1, 1990.
*10(1) Agreement and Plan of Reorganization incorporated herein by
reference to exhibit 7(c) of Form 8-K filed April 4, 1991.
*10(2) Plan and Agreement of Merger incorporated herein by reference to
exhibit 7(c)(1) of Form 8-K filed May 14, 1991.
10(3) Computer Technology License Agreement dated November 12, 1997,
between Phoenix Technology, Inc. and Dauphin Technology, Inc.
10(4) License Agreement dated May 3, 1996, between Microsoft Corporation
and Dauphin Technology, Inc.
*10(5) Debtor's Motion Seeking Entry of Order Authorizing the Debtor to
enter into Asset Purchase Agreement with Victor Baron, Savely Burd and
Interactive Controls, Inc. filed February 6, 1996 with United States
Bankruptcy Court incorporated herein by reference to exhibit 7(b) of
Form 10-Q filed May 15, 1996.
*10(6) Debtor's Third Amended and restated Plan of Reorganization filed
May 9, 1996 with United States Bankruptcy Court incorporated herein by
reference to exhibit 7(b) of Form 10-Q filed January 26, 1996.
*10(7) Share Transfer Restriction Agreement dated April 30, 1996 for
several control persons. The parties are persons on the Board of
Directors and Executives of the Company incorporated herein by reference
to exhibit 10(16) of Form S-1 filed November 29, 1996.
*10(8) Stock Exchange Agreement dated June 6, 1997 between Richard M.
Schultz, Georgette Scarpelli, Donald Kirk and Dauphin Technology, Inc.
incorporated herein by reference to exhibit 6(b) of Form 8-K filed June
20, 1997.
24(1) Consent of Arthur Andersen LLP., independent public accountants.
24(2) Consent of Rieck and Crotty, P.C.
*28(1) Confidential Private Placement Memorandum dated September 1, 1997
included as an exhibit to Form 10-Q for the quarter ended September 30,
1997, and filed October 14, 1997, incorporated herein by reference.
--------- -------- --------- --------
Revenues $ 4,736 $ 11,305 $ 344,975 $ 498,821
Gross Profit (Loss) 238,886 (346,256) 27,747 (1,936,167)
Net Loss (2,312,421)** Previously filed or incorporated by reference.
Item 17. UNDERTAKINGS
(A) Subject to the terms and conditions of Section 15(d) of the
Securities Exchange Act of 1934, the undersigned Company hereby
undertakes to file with the Securities and Exchange Commission such
supplementary and periodic information, documents and reports as may be
prescribed by any rule or regulation of the Commission heretofore or
hereafter duly adopted pursuant to authority conferred in the section.
(B) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, post-effective amendment to this registration statement:
(i) To include any Prospectus required by Section 10(a) of the
Securities Act of 1993;
(ii) To disclose in the Prospectus any change in the offering price
at which any registering shareholders subject to the requirement
of a Pricing Amendment are offering their registered securities
for sale;
(iii) To reflect in the Prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iv) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at
the termination of the offering.
(C) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Company pursuant to the forgoing provisions,
or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Act and will be governed by
the final adjustment of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City
of Palatine and State of Illinois, on the 13th day of March, 1998.
DAUPHIN TECHNOLOGY, INC.
By:_______________________________ By: _________________________________
Andrew J. Kandalepas, President Savely Burd, Chief Financial Officer
Pursuant to the requirement of the Securities Act of 1933, as amended,
this Registration Statement has been duly signed by the following
persons in the capacity and on the dates indicated.
SIGNATURE/TITLE Date SIGNATURE/TITLE Date
3/13/98 3/13/98
_____________________________ ____________________________
Andrew J. Kandalepas, Chairman of Douglas P. Morris, Director
the Board of Directors /President
/Chief Executive Officer
3/13/98 3/13/98
_____________________________ ____________________________
Jeffrey Goldberg, Secretary Dean F. Prokos, Director
/Director
3/13/98 3/13/98
____________________________ ___________________________
Wm. Paul Bunnell, Director Gary E. Soiney, Director
3/13/98
____________________________
Andrew Prokos, Director
EXHIBIT 24(1)
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made part of
this Registration Statement on Form S-1 for Dauphin Technology, Inc.
Arthur Andersen LLP
Chicago, Illinois
March 13, 1998
EXHIBIT 24(2)
March 13, 1998
Dauphin Technology, Inc.
800 East Northwest Highway
Suite 950
Palatine, Illinois 60067
In re Form S-1 Registration Statement
Gentlemen:
We have acted as counsel to Dauphin Technology, Inc., an Illinois
corporation (the "Company'), in connection with the preparation and
filing with the Securities and Exchange Commission under the Securities
Act of 1933, as amended (the "Act"), of a Registration Statement on Form
S-l (the "Registration Statement") relating to the registration of
7,487,935 Shares of the Company's common stock (the "Shares").
As such counsel, we have examined the Registration Statement and such
other papers, documents and certificates of public officials and
certificates of officers of the Company as we have deemed relevant and
necessary as a basis for the opinions hereinafter expressed. In such
examinations, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals and the
conformity to original documents of all documents submitted to us and
conformed or photocopies.
Based upon and subject to the foregoing, it is our opinion that the
Shares covered by the Registration Statement have heretofore been
legally issued by the Company and are fully paid and non-assessable and
shall continue to be such when and if sold by the Selling Stockholders.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the
caption "Legal Matters" in the Prospectus Constituting a part of the
Registration Statement.
Very truly yours,
Rieck and Crotty, P.C.(1,249,631) (1,173,789)** (4,081,521)
Net Loss per share
Basic $ (0.04)** $ (0.02) $ (0.02)** $ (0.07)
Diluted $ (0.04)** $ (0.02) $ (0.02)** $ (0.07)
* Net loss and per share amounts for the quarter ended June 30, 2001 have been
adjusted from previously reported amounts to reflect the issuance of 1,032,118
shares of common stock to the Chairman of the Board and CEO of the Company to
replace shares issued under a personal guarantee amounting to $1,241,741 (0.02
per share).
** Net loss and per share amounts for the quarters ended March 31, 2000 and
September 30, 2000 have been adjusted from previously reported amounts to offset
the difference between the quoted market price and the proceeds from stock sales
under the private placement against additional paid in capital rather than
interest expense amounting to $1,721,939 ($0.03 per share) for the quarter ended
March 31, 2000 and $343,416 ($0.01 per share) for the quarter ended September
30, 2000.
F-35
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the sale
and distribution of the securities being registered hereby. All amounts are
estimated except the Securities and Exchange Commission registration fee.
Amount
------
SEC registration fee $ 890.00
Accounting fees and expenses 14,000.00
Legal fees and expenses 16,000.00
Miscellaneous fees and expenses 6,500.00
-------------
Total $ 37,390.00
-------------
Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Registrant is incorporated in the State of Illinois. Section 8.75 of the
Illinois Business Corporation Act defines the powers of registrant to indemnify
officers, directors, employees and agents.
In additional to the provisions of Illinois Business Corporation Act Section
8.75, and pursuant to the power granted therein, registrant has adapted Article
XII of its Bylaws which provides as follows:
ARTICLE XII
INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS
SECTION 1 The corporation shall indemnify any person who was or is a party, or
is threaten to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a directors, officer, employee or agent of the
corporation or fiduciary of any employee benefit plan maintained by the
corporation, or who is or was a director, officer, employee or agent of the
corporation of a fiduciary as aforesaid, or who is or was serving at the request
of the corporation as a director, officer, employee, agent of fiduciary of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees), judgments, fines, and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding, if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
corporation (or, in the case of a fiduciary, the best interests of the plan and
plan participants) and, with respect to any criminal action proceeding, had no
reasonable cause to believe his conduct was unlawful. This termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contender or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had
reasonable cause to believe that this conduct was unlawful.
SECTION 2 The corporation shall indemnify any person who was or is a party, or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation or fiduciary as aforesaid, or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorney's fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit, if he acted in
good faith and in a manner he reasonably believed to be in, or not opposed to
the best interests of the corporation (or, in the case of a fiduciary, the best
interests of the plan and plan participants), except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable for negligence or misconduct in the
performance of his duty to the corporation, unless, and only to the extent that
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability, but in view
II-1
of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnify for such expenses as the court shall deem proper.
SECTION 3 To the extent that a director, officer, employee or agent of a
corporation or fiduciary as aforesaid has been successful, on the merits or
otherwise, in the defense of any action, suit or proceeding referred to in
proceeding sections, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorney's fees) actually and
reasonably incurred by him in connection therewith.
SECTION 4 Any indemnification under section 1 and 2 hereof (unless ordered by a
court) shall be made by the corporation only as authorized in the specific case,
upon a determination of the director, officer, employee, agent of fiduciary is
proper on the circumstances because he has met the applicable standard of
conduct set forth in said sections. Such determination shall be made (1) by the
board of directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (2) if such a quorum is
not obtained, or even if obtainable, a quorum of disinterest directors so
directs, by independent legal counsel in a written opinion, or (3) by the
shareholders.
SECTION 5 Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the corporation in advance of the final disposition of
such action, suit or proceeding, as authorized by the board of directors in the
specific case, upon receipt of an undertaking by or oh behalf of the director,
officer, employee or agent to repay such amount unless it shall ultimately be
determined that he is entitled to be indemnified by the corporation as
authorized in this Article.
SECTION 6 The indemnification provided by this Article shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaws, agreement, vote of shareholders or disinterested
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent, and shall
incur to the benefit of the heirs, executors and administrators of such person.
SECTION 7 The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation
of fiduciary, or who is or was serving at the request of the corporation as a
director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, trust or other enterprise, against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of this Article.
SECTION 8 In the case of a merger, the term "corporation" shall include, in
additional to the surviving corporation, any merging corporation absorbed in a
merger, which if its separate existence had continued, would have had the power
and authority to indemnify its directors, officers and employees or agents, so
that any person who was a director, officer, employee or agent of such merging
corporation, or was serving at the request of another corporation, as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under the
provisions of this section with respect to the surviving corporation as such
person would have with respect to such merging if its separate existence had
continued.
SECTION 9 For the purpose of this Article, referenced to "other enterprises"
shall include employee benefit plans; reference to "fines" shall include any
excise tax assessed on a person with respect to an employee benefit plan; and
references to the phrase "serving at the request of the corporation" shall
include any service as a director, officer, employee, or agent with respect to
an employee benefit plan, its participants, or beneficiaries. A person who acted
in good faith and in a manner he or she reasonably believed to be in the best
interests of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the corporation" as referred to in this Article.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of registrant pursuant
to the foregoing provisions, or otherwise, registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, enforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by registrant of expenses incurred in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction
II-2
the questions whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such an
issue.
Except to the extent herein above set forth, there is no charter provision,
bylaw, contract, arrangement or statute pursuant to which any director or
officer of registrant is indemnified in any manner against any liability which
he may incur in his capacity as such.
Item 15. Recent Sales of Unregistered Securities
Within the past three years, the registrant has sold the following securities
that were not registered under the Securities Act. The purchases and sales were
exempt pursuant to Section 4(2) of the Securities Act and/or Regulation D
promulgated thereunder, as transactions by an issuer not involving a public
offering, where the purchasers represented their intention to acquire the
securities for investment only, not with a view to distribution, and received or
had access to adequate information about the registrant.
1. In May 1999, the Company issued 150,000 shares to two accredited
investors, Peter Tsolinas and Ernest Kezios, in exchange for $82,500. We
undertook this transaction to raise funds for general working capital purposes.
In addition to the shares the Company issued warrants to purchase 150,000 shares
of common stock at an exercise price of $0.55 per share. The warrants are
exercisable immediately and expire in three years. The warrants were valued at
$53,250 using the Black-Scholes securities valuation model, assuming among other
things, a 6% risk free interest rate, 0% dividend yield, 5 year life and 120%
volatility. The purchase and sale were exempt pursuant to Rule 506 and
Regulation D as transactions by an issuer not involving a public offering, where
the purchases represented their intention to acquire the securities for
investment only, not with a view to distribution, and received or had access to
adequate information about the registrant, consisting of periodic reports filed
pursuant to Section 13(a) and 15 (d) of the Exchange Act. The securities were
issued without use of advertising or general solicitation following the
Company's delivery of a copy of the most recent Form 10-K, proxy statement and
interim Forms 10-Q to the investors and the investors delivery of a subscription
agreement stating the investors qualification as accredited investors, including
the investor's statement of intent to acquire the securities for the investors'
own investment purposes and not with a view toward further distribution.
2. In May 1999, the Company issued 586,764 common shares to Augustine
Funds, LP, an institutional investor, in exchange for $240,000 of the remaining
principal of the Convertible Debentures-2001A. That closed out all debts the
Company had in relation to the Convertible Debentures with Augustine Funds LP.
3. On May 28, 1999 the Company signed a Stock Purchase Agreement with
Crescent International Ltd. ("Crescent"), an investment company managed by
GreenLight (Switzerland) SA, which allows the Company and obligates Crescent to
purchase shares from the Company based on terms and conditions outlined in the
agreement. We undertook this transaction to raise funds for general working
capital purposes. In total Crescent agreed to purchase up to $2,250,000 of the
common stock within the next twenty-four months. Crescent agreed to purchase
from the Company shares based on ninety percent of the daily average trading
value, which is computed by multiplying the closing bid price by the daily
volume of the Company's common stock traded average over the twenty days prior
to closing. In connection therewith the Company sold to Crescent 1,048,951
shares for $450,000 at an average price of $0.43 per share including $58,000 of
closing fees. The Company has the right to sell additional shares with an
interval of 25 business days with a minimum of $100,000 per sale and a maximum
of $500,000 based on the average daily value as described above. In addition to
the stock, Crescent received an Incentive Warrant to purchase 750,000 common
shares at a price of $0.6435 per share. The Warrants were valued at $235,500
using Black-Scholes securities valuation model assuming among other things 6%
risk free rate, 0% dividend yield, five years life and 120% volatility. Under
this agreement, on May 28, 1999 the Company sold to Crescent 350,000 shares for
$148,050 at an average price of $0.423 per share, including $2,961 of closing
fees.
4. In the third quarter of 1999, the Company issued 14,963 treasury shares
and 2,086,540 common shares to a group of eight accredited investors in exchange
for $598,817 or an average of $0.29 per share. . We undertook this transaction
to raise funds for general working capital purposes. In addition to the shares
the Company issued warrants to purchase 1,651,600 shares of common stock at an
average exercise price of $0.47 per share. The warrants are exercisable
immediately and expire in three to five years. The Warrants were valued at
$443,622 using Black-Scholes securities valuation model assuming among other
things 6% risk free rate, 0% dividend yield, five years life and 120%
volatility. The purchase and sale were exempt pursuant to Rule 506 and
Regulation D as transactions by an issuer not involving a public offering, where
the purchasers represented their intention to acquire the securities for
investment only, not with a view to distribution, and received or had access to
adequate information about the registrant,
II-3
consisting of periodic reports filed pursuant to Section 13(a) and 15 (d) of the
Exchange Act.
5. During the third quarter, the Company agreed to issue a total of
407,868 shares to satisfy certain payables in the cumulative amount of $223,825
or approximately $0.55 per share. The issuance was exempt pursuant to Section
4(2) as transactions by an issuer not involving a public offering.
6. In September 1999, a Warrant for a total of 100,000 shares that was
issued in July 1999 was exercised by James Stella at $0.53 per share. The
Company received a total of $53,000 from such exercise. We used the funds for
general working capital purposes. The securities were issued without use of
advertising or general solicitation following the Company's delivery of a copy
of the most recent Form 10-K, proxy statement and interim Forms 10-Q to the
investor and the investor's delivery of a subscription agreement stating the
investor's qualification as an accredited investor, including the investor's
statement of intent to acquire the securities for its own investment purposes
and not with a view toward further distribution.
7. On October 27, 1999 in connection with the Stock Purchase Agreement
signed by the Company on May 28, 1999 with Crescent, the Company sold to
Crescent 447,012 shares for $141,935 at an average price of $0.32 per share,
including $2,897 of closing fees.
8. In November 1999, the Company issued 457,650 shares to three accredited
investors, Brian Smith, Dan Schlaphohl and Paul Zeedyk, in exchange for $156,500
or $0.33 per share. We undertook this transaction to raise funds for general
working capital purposes. The purchase and sale were exempt pursuant to Rule 506
and Regulation D as transactions by an issuer not involving a public offering,
where the purchasers represented their intention to acquire the securities for
investment only, not with a view to distribution, and received or had access to
adequate information about the registrant, consisting of periodic reports filed
pursuant to Section 13(a) and 15 (d) of the Exchange Act.
9. During the third quarter of 1999 a Warrant for 302,858 shares at $0.20
was exercised by Dan Schlapkohl. The Company received a total of $60,285 for the
shares. We applied these proceeds to general working capital. The securities
were issued without use of advertising or general solicitation following the
Company's delivery of a copy of the most recent Form 10-K, proxy statement and
interim Forms 10-Q to the investor and the investor's delivery of a subscription
agreement stating the investor's qualification as an accredited investor,
including the investor's statement of intent to acquire the securities for its
own investment purposes and not with a view toward further distribution.
10. In November 1999, in exchange for financial advisory services rendered,
the Company issued 300,000 shares to Nick Fegen, a consultant. The purchase and
sale were exempt pursuant to Section 4(2) as a transaction by an issuer not
involving a public offering. The securities were issued without use of
advertising or general solicitation following the Company's delivery of a copy
of the most recent Form 10-K, proxy statement and interim Forms 10-Q to the
investor and the investor's delivery of a subscription agreement stating the
investor's qualification as an accredited investor, including the investor's
statement of intent to acquire the securities for its own investment purposes
and not with a view toward further distribution.
11. In December 1999, the Company converted $70,000 of short-term notes
including $5,000 of interest from Jim Lekos into 350,000 shares. The purchase
and sale were exempt pursuant to Rule 506 and Regulation D as transactions by an
issuer not involving a public offering, where the purchaser represented its
intention to acquire the securities for investment only, not with a view to
distribution, and received or had access to adequate information about the
registrant, consisting of periodic reports filed pursuant to Section 13(a) and
15 (d) of the Exchange Act.
12. In December 1999, the Company issued 362,858 shares in exchange for
$72,572 from two accredited investors, Steve Notaro and Dan Schlapkohl. We
undertook this transaction to raise funds for general working capital purposes.
In addition to shares, the Company issued two Warrants for the total of 362,858
common shares to the investors with a strike price of $0.20. The Warrants were
valued at $68,637 using Black-Scholes securities valuation model assuming among
other things 6% risk free rate, 0% dividend yield, five years life and 120%
volatility. The purchase and sale were exempt pursuant to Rule 506 and
Regulation D as transactions by an issuer not involving a public offering, where
the purchasers represented their intention to acquire the securities for
investment only, not with a view to distribution, and received or had access to
adequate information about the registrant, consisting of periodic reports filed
pursuant to Section 13(a) and 15 (d) of the Exchange Act.
13. During the first and second quarter of 2000, the Company conducted a
private placement of 4,654,613 common shares and approximately 1,300,000
warrants to a group of approximately 135 accredited investors in
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exchange for approximately $7,300,000. A listing of all accredited investors
appears in the Company's Form S-1 filing dated July 21, 2000, File No. 333-35808
effective July 28, 2000. The proceeds were used to settle the majority of trade
payables, for day-to-day operations and to start the development of the set-top
box. The purchases and sales were exempt pursuant to Rule 506 and Regulation D
as transactions by an issuer not involving a public offering, where the
purchasers represented their intention to acquire the securities for investment
only, not with a view to distribution, and received or had access to adequate
information about the registrant, consisting of periodic reports filed pursuant
to Section 13(a) and 15 (d) of the Exchange Act. The securities were issued
without use of advertising or general solicitation following the Company's
delivery of a copy of the most recent Form 10-K, proxy statement and interim
Forms 10-Q to the investor and the investor's delivery of a subscription
agreement stating the investor's qualification as an accredited investor,
including the investor's statement of intent to acquire the securities for its
own investment purposes and not with a view toward further distribution.
14. In January 2000, the Company issued 480,000 shares to Bulfon S.A. in
exchange for cancellation of $300,000 of customer deposits. The purchase and
sale were exempt pursuant to Section 4(2) as a transaction by an issuer not
involving a public offering.
15. In January 2000, the Company issued warrants to Nick Fegen, a
consultant (see #10 above), for financial advisory services rendered, to
purchase 350,000 shares at an exercise price of $1.00. The purchase and sale
were exempt pursuant to Section 4(2) as a transaction by an issuer not involving
a public offering. The securities were issued without use of advertising or
general solicitation following the Company's delivery of a copy of the most
recent Form 10-K, proxy statement and interim Forms 10-Q to the investor and the
investor's delivery of a subscription agreement stating the investor's
qualification as an accredited investor, including the investor's statement of
intent to acquire the securities for its own investment purposes and not with a
view toward further distribution.
16. In January 2000, the Company issued 500,000 shares to Provonat
Technologies Limited for services rendered in relation to the set-top box
agreement with Estel Telecommunications S.A. The purchase and sale were exempt
pursuant to Section 4(2) as a transaction by an issuer not involving a public
offering.
17. In April 2000, the Company completed its private placement and issued
3,630,000 warrants to an investment banker, Cutter and Co., in lieu of
consulting fees. The purchase and sale were exempt pursuant to Rule 506 and
Regulation D as transactions by an issuer not involving a public offering, where
the purchaser represented its intention to acquire the securities for investment
only, not with a view to distribution, and received or had access to adequate
information about the registrant.
18. On April 26, 2000, the Company completed a common stock purchase
agreement, escrow agreement and registration rights agreement with Techrich
International Limited ("Techrich"), an accredited institutional investor. These
agreements provide a $100,000,000 equity line of credit as the Company requests
over an 18 month period, in return for common stock and warrants to be issued to
the investor. Once every 22 days, the Company may request a draw of up to
$10,000,000 of that money, subject to a maximum of 18 draws. The maximum amount
the Company actually can draw down upon each request will be determined by the
volume-weighted average daily price of the Company's common stock for the 22
trading days prior to its request and the average trading volume for the 45
trading days prior to the request. Each draw down must be for at least $250,000.
Use of a 22 day trading average was negotiated to reduce the impact of market
price fluctuations over any calendar month, which generally includes 22 trading
days. At the end of a 22-day trading period following the drawdown request, the
amount of shares is determined based on the volume-weighted average stock price
during that 22-day period in accordance with the formulas in the common stock
purchase agreement. We undertook this transaction to raise funds for general
working capital purposes.
19. On April 28, 2000, the Company filed with the Securities and Exchange
Commission a Form S-1 registration statement relating to 15,332,560 shares of
common stock issued to stockholders in private transactions, 11,958,963 shares
underlying options and warrants previously issued to employees, and 6,000,000
shares to be issued when the Company requests a drawdown under the Techrich
common stock purchase agreement.
20. On July 28, 2000, the Securities and Exchange Commission declared the
registration statement effective. Pursuant to the common stock purchase
agreement with Techrich, the Company issued to Ladenburg, Thalman, an
institutional investor, as a placement fee warrants to purchase 250,000 shares
of common stock at an exercise price of $5.481.
21. On July 31, 2000, the Company issued a drawdown notice in connection
with the common stock purchase
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agreement with Techrich for $5,000,000. We undertook this transaction to raise
funds for general working capital purposes. Upon receipt of the funds, the
Company issued 1,354,617 shares of common stock and warrants to purchase 101,463
shares of common stock at exercise prices ranging from $4.06 to $4.22.
22. In September 2000, the Company issued 73,750 stock options to certain
employees under employment agreements. At the time of issuance, the option price
was below the market price and the Company recorded $70,622 as additional
compensation expense. The purchase and sale were exempt pursuant to Section 4(2)
as transactions by an issuer not involving a public offering.
23. On October 17, 2000, the Company issued a drawdown notice in connection
with the common stock purchase agreement with Techrich for $2,000,000. We
undertook this transaction to raise funds for general working capital purposes.
Upon receipt of the funds, the Company issued 781,999 shares of common stock and
warrants to purchase 44,646 shares of common stock at exercise prices ranging
from $3.26676 to $4.4369.
24. On October 20, 2000 the Company entered into an agreement with Best
S.A. to act as its distributor/agent in Greece. On October 26, 2000 the Company
issued 1,550,000 shares of restricted stock to Best S.A. as a performance bond
to assure the Company's compliance with the Set-Top Box Agreement by and between
the Company and Estel S.A. These shares have not been included in the issued and
outstanding shares as of December 31, 2000, as Best S.A. has acknowledged that
they would return the shares to the Company upon satisfactory compliance with
the Set-Top Box Agreement. The agreement with Best S.A. requires the Company to
register these shares with the Securities and Exchange Commission during 2000.
To secure performance of the Company's obligation to register these shares,
Andrew J. Kandalepas, Chairman of the Board and CEO of the Company, granted to
Best S.A. a security interest in 1,032,118 shares of Company stock owned by him.
25. In December 2000, the Company issued to Brian Smith, Mark Thompson and
Stavros Galanakis, 22,000 shares of common stock and warrants to purchase
148,265 shares of common stock at exercise prices ranging from $1.0312 to $1.25,
as payment for certain advertising and promotional expenses and consulting
services related to the establishment of an office in Europe. The purchase and
sale were exempt pursuant to Section 4(2) as a transactions by an issuer not
involving a public offering.
26. In December 2000, the Company re-priced approximately 3,012,000
warrants it had previously issued to outside consultants, Cutter and Company, in
consideration of additional services rendered to the Company pertaining to
financing. The warrants were originally issued with an exercise price ranging
from $10.00 to $5.00, and were re-priced with exercise prices ranging from $5.00
to $2.00 per share. The re-pricing created a charge to earnings of approximately
$234,000, which was calculated using the Black-Scholes pricing model assuming 0%
dividend yield, risk free interest rate of 6%, volatility factor of 224% and an
expected life of 2.6 years.
27. During the first quarter of 2001, the Company received proceeds in the
amount of $102,300 for the exercise of 210,000 warrants issued to Joe Lemberger
and Ryan Miller. Additionally, employees exercised 4,000 stock options at a
price of $.50 per share. The proceeds were used for general working capital
purposes.
28. During the second quarter of 2001, employees exercised 4,000 stock
options at a price of $.50 per share.
29. On April 3, 2001, the Company and Estel Telecommunications S.A.
cancelled the performance bond issued on October 26, 2000 and the 1,550,000
shares of restricted stock held by Best S.A. were returned to the Company. In
connection with the cancellation of the shares, Best S.A. executed the personal
guarantee of Mr. Andrew J. Kandalepas, which he had granted to secure the
performance of the Company's obligation to register the 1,550,000 shares issued
in connection with the performance bond and retained the 1,032,118 shares. The
set-top box agreement with Estel Telecommunications S.A. terminated on July 1,
2001 due to lack of performance on behalf of Estel. This transaction was entered
into on behalf of the Company and therefore the Company recorded an expense of
$1,241,741, with an offsetting entry to additional paid in capital.
30. In April 2001, the Company issued to The DeClan Group, consultants,
30,000 shares of common stock and warrants to purchase 70,000 shares of common
stock at an exercise price of $1.36 per share, as payment for certain
promotional and consulting services. In September 2001, the Company issued
additional warrants to purchase 16,666 shares of common stock at an exercise
price of $1.395 per share to finalize the arrangement with the consultants. The
purchase and sale were exempt pursuant to Section 4(2) as transactions by an
issuer not involving a public offering.
31. Effective July 1, 2001, the Company completed the acquisition of
substantially all of the assets of Suncoast
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Automation, Inc., a wholly owned subsidiary of ProtoSource Corporation, pursuant
to an Asset Purchase Agreement. The purchase price was 766,058 shares of the
Company's common stock valued at approximately $1.1 million based on the closing
bid price of $1.47 per share on June 29, 2001. The purchase and sale were exempt
pursuant to Section 4(2) as a transaction by an issuer not involving a public
offering.
32. During the third quarter of 2001, the Company received proceeds in the
amount of $75,000 for the exercise of 75,000 warrants by TDG Limited. Proceeds
were used for general working capital purposes.
33. On August 14, 2001 the Company issued a drawdown notice in connection
with the common stock purchase agreement with Techrich for $300,000. We
undertook this transaction to raise funds for general working capital purposes.
Upon receipt of the funds, the Company issued 258,968 shares of common stock and
warrants to purchase 22,006 shares of common stock at an exercise price of
$1.14516.
34. On September 13, 2001 the Company filed with the Securities and
Exchange Commission a Form S-3 registration statement relating to 6,964,724
shares of common stock. The shares were issued by the Company in respect of the
following: (i) 766,058 shares were issued by the Company in connection with the
acquisition of the net assets of Suncoast; (ii) 52,000 shares were issued by the
Company as payment for certain advertising and promotional expenses and
consulting services; and (iii) 6,146,666 shares issuable by the Company to
shareholders upon the exercise by them of issued and outstanding warrants and
options. On September 27, 2001, the Securities and Exchange Commission declared
the registration statement effective.
35. During the fourth quarter of 2001, employees exercised 27,600 stock
options at a price of $.89 per share.
36. In November 2001, the Company issued to Ensign Resources and Brian
Smith warrants to purchase 175,000 shares of common stock at exercise prices
ranging from $1.00 to $1.50, as payment for certain advertising and promotional
expenses. The purchase and sale were exempt pursuant to Section 4(2) as a
transaction by an issuer not involving a public offering.
37. On December 20, 2001, the Board of Directors approved the issuance of
1,032,118 shares to the Chairman of the Board and CEO of the Company to replace
the shares that Best S.A. retained under the personal guarantee. The shares were
valued at $1,241,741 based on the closing price of $1.20 on April 3, 2001. The
purchase and sale were exempt pursuant to Section 4(2) as a transaction by an
issuer not involving a public offering.
Except as set forth above, no underwriters were employed in any of the above
transactions. Appropriate legends were affixed to the share certificates and
warrants issued in the above transactions.
II-7
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit No. Description of Document
*3(1) Certificate of Incorporation filed July 27, 1990, incorporated herein
by reference to exhibit 7(c)(1) of Form 8-K filed May 14, 1991.
*3(2) By-Laws as amended, incorporated herein by reference to exhibit 3(2) of
Form 10-K for the fiscal year ended December 31, 1997.
*4(1) Specimen Common Stock Certificate incorporated herein by reference to
exhibit 4(1) of Form S-18 filed June 1, 1990.
*10(1) Agreement and Plan of Reorganization incorporated herein by reference
to exhibit 7(c) of Form 8-K filed April 4, 1991.
*10(2) Plan and Agreement of Merger incorporated herein by reference to
exhibit 7(c)(1) of Form 8-K filed May 14, 1991.
*10(3) Computer Technology License Agreement dated November 12, 1997, between
Phoenix Technology, Inc. and Dauphin Technology, Inc. included as an
exhibit to Form S-1 filed march 17, 1998, incorporated herein by
reference.
*10(4) License Agreement dated May 3, 1996, between Microsoft Corporation and
Dauphin Technology, Inc. included as an exhibit to Form S-1 filed March
17, 1998, incorporated herein by reference.
*10(5) Equity line of credit agreement by and between Techrich International
Limited and Dauphin Technology, Inc. dated April 12, 2000 including
Common Stock Purchase Agreement, Registration Rights Agreement, Escrow
Agreement and Form of a stock Purchase Warrant included as an exhibit
to Form 8-K filed on April 20, 2000 incorporated herein by reference.
*10(6) Amendment No. 1 to Common Stock Purchase Agreement dated July 10, 2000
between Dauphin Technology, Inc. and Techrich International Limited.
*10(7) Asset Purchase Agreement, by and among the Company, ADD Acquisition
Corp., T & B Design, Inc. (f/k/a Advanced Digital Designs, Inc.),
Advanced Technologies, Inc., 937 Plum Grove Road Partnership, the
Stockholders of T & B Design, Inc. and Advanced Technologies, Inc. and
the partners of 937 Plum Grove Road Partnership, dated August 18, 2000
included as an exhibit to Form 8-K/A filed on September 25, 2000
incorporated herein by reference.
*10(8) Asset Purchase Agreement, by and among the Company, Suncoast
Acquisition Corp., ProtoSource Corporation and Suncoast Automation,
Inc. dated July 1, 2001 included as an exhibit to Form 8-K filed on
July 14, 2001 incorporated herein by reference.
*10(9) Securities Purchase Agreement, by and between the Company and Crescent
International Ltd. dated September 28, 2001 including Registration
Rights Agreement and Form of Stock Purchase Warrant included as an
exhibit to Form 8-K filed on October 12, 2001 incorporated herein by
reference.
24(1) Consent of Grant Thornton LLP., independent public accountants.
24(2) Consent of Rieck and Crotty, P.C.
* Previously filed or incorporated by reference.
II-8
Item 17. UNDERTAKINGS
(A) Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Company hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in the section.
(B) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
post-effective amendment to this registration statement:
(i) To include any Prospectus required by Section 10(a) of
the Securities Act of 1993;
(ii) To disclose in the Prospectus any change in the offering
price at which any registering shareholders subject to the
requirement of a Pricing Amendment are offering their
registered securities for sale;
(iii) To reflect in the Prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iv) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(C) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the forgoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjustment of
such issue.
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Palatine
and State of Illinois, on the 12th day of June, 2002.
DAUPHIN TECHNOLOGY, INC.
By: /s/Andrew J. Kandalepas
-------------------------------
Andrew J. Kandalepas, President
Pursuant to the requirement of the Securities Act of 1933, as
amended, this registration statement has been duly signed by the following
persons in the capacity and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Andrew J. Kandalepas Chairman of the Board/President/ June 12, 2002
- ------------------------
Andrew J. Kandalepas Chief Executive Officer
/s/ Harry L. Lukens, Jr. Chief Financial Officer/ June 12, 2002
- ------------------------
Harry L. Lukens, Jr. Assistant Secretary
/s/ Christopher L. Geier Executive Vice President June 12, 2002
- ------------------------
Christopher L. Geier
/s/ Jeffrey Goldberg Secretary/Director June 12, 2002
- -------------------==---
Jeffrey Goldberg
/s/ Gary E. Soiney Director June 12, 2002
- ------------------------
Gary E. Soiney
/s/ Mary Ellen W. Conti Director June 12, 2002
- ------------------------
Mary Ellen W. Conti
II-10